That is a really cool demo.
I'm guessing he's using the reflected light as a proximity sensor. It's just like all the LED/phototrasistor paired proximity sensors, only using the LED as both the light source and the detector. It's interesting, but it's obviously limited just like a regular Prox sensor. Ambient light and changes in ambient light have to be adjusted for. Shadows, anything like that can cause unwanted readings, or make it unusable.
I like how he's using actual proximity reading and not just on/off sensing.