Very cool tech. I don't know how successful it would be as a "controller" though considering how often that doctor died trying to play the first level though.

@Chris
According to the guys from Waterloo, someone made it as far as World 4 :-)
It's actually pretty neat how they created the input--since you never used Up in SMB, they double-mapped Up and A, so you'd look up to jump. I'm assuming they also double map B & left + right, since Mario always appears to be running.
This is a tech demo, so I wouldn't count on anyone trying to commercialize it. The guys at Waterloo Labs get paid to come up with cool shit like this. Most of it will never go to market. Another was where they drove a car with an iPhone: http://www.youtube.com/watch?v=_x5IziyOcAg

Wow. Imagine if they could combine this with Kinect

I'm really mystified by this technology. I wonder if this will work well with the few FPS games that are on the Wii. I can just imagine looking around and shooting in a different direction. @__@