"funny thing: my friend would rather pay the 50 some dollars for xbox live just to know that his gamertag is unique than play online for free (ala ps2 and rev) with a name that hundreds of other people may have."
I was actually worried about the non-unique username thing too. The thing is, in real life, peoples' names aren't unique, and yet we rarely have trouble telling people apart. Because each person has a unique ID in addition to their username, games will remember people in friends lists, high-scores lists, people-you-recently-played-with lists, etc, and I don't think anybody will have a problem with confusing people with one another.
If, for example, you run across somebody with a generic handle like 'mario', and want to play with him again, just add him to your friends list. If you forget to add him, and run into another 'mario' later, and want to know if he's the same guy, I'm sure you'll be able to look at their user information to determine that.
And the advantage to this system is that you don't have annoying names like mario_mario120903981.
So, yeah. Just explain all of that to your friend.