They issued out the SDK to others to allow them to develop whatever they want.
The talk to X-Box and ask it to play a movie, it does do that.
The manipulate graphic thing, there have been people who've managed to do that with Kinect.
Virtual instruments is something that it actually has done, and more games with that kind of thing are coming.
It goes beyond that, that's why they say "what's possible"... but it's a good way to say the SDK is going public so people can take all these homebrew hacks and do what they want.