There are a lot of people doubting this as being legit.  So the guy apparently made another video.

A lot of people thought it was fake, so he decided to make another video in response.

   
 
So here are the guy's theory on how the game works. 
 
-Apparently the game doesn't work well when sitting (Not to say it won't work at all).  While standing up and sitting down to play creates two different results. 
-Believes it is an intended feature to known as Lazy ass mode.  He tried hiding his hands and different things but producing the same results. 
  
Either way, even without this video, I am not sure why they made an effort to put out kinect.  I don't hate the Xbox360, but kinect doesn't seem to have those "chops" if you will.  I think Nintendo decided to add motion controls and a touchpad to combat piracy, which did a pretty good job for awhile.  However, Kinect seems like some bad rip off. 
 
 
 
 
 
 
 
 
 

The kinect is fine, it's just a shining example of bad software. I'm not saying there are any good games on the kinect, just that the hardware is fine but there aren't any worthwhile games.

Yeah, wow, that sucks. Why would anyone buy this? 
 
No, really, somebody tell me. 
 
What does Kinect do that is just so gosh darn amazing? I'm the controller? No, my controller is the controller... 

I don't really view that video as a failure of the hardware as much as that's how the people who developed the game wanted it to be.  Obviously the Kinect can tell the difference if it can see a player's feet or not and the developer decided to make it auto-pilot.  The other thing is the feature may have been developed so players unable to physically stand can still enjoy gaming aka non-discrimination.
 
That said, other than Dance Central the games need to be better than shovelware like the shown racing game.