In the video, it is clear that the console and the phone are communicating in real-time, probably over Wi-Fi. This is not just Kinect motion sensing ported to the phone; this is player input from the phone being added to a Kinect game, turning the phone into an auxiliary controller. In other words, some form of cross-platform multiplayer is coming to the Microsoft world:
Microsoft sold 8 million Kinect units in 60 days. WP7 sales weren't nearly as good but if this type of gaming gets picked up, we'd bet the two will help each other out. WP7 is already attractive to gamers as it comes with Xbox Live integration, but what you see above is a whole different ball game (pardon the pun).
"The technology shown in the video is real and is an example of the types of experiences we’ll be bringing to market," a Microsoft spokesperson said in a statement. "We remain committed to building a network that connects you to your friends and entertainment in innovative ways. This is just one example of what’s possible as we explore new ways to interact with our technology. At this time, we aren’t discussing specific experiences we’ll be offering or a product timeline, but we look forward to sharing more in the future."