Sure, defection has a higher expected value, *IF* you assume the other guy is flipping a coin to make his choice. But if you assume the other guy is very similar to yourself, you should expect the other person to reach the same conclusion you do as to what action to take, whatever that may be. Thus instead of looking at the payoffs for each column, look at the two places where each player makes the same choice. In those two places the cooperative choice results in a higher payoff for both players.

The blocks are an interesting controller/display, but the real make-or-break element is the application. I agree with some of the posters here that you could do many of the same things in the demo using a simple mouse-driven interface. Are the blocks supplying all the computing hardware, or do they function in concert with a central computer?

The strength of these as a controller/display is what they bring to the table that more common hardware such as a mouse/keyboard/monitor combination do not. Their ability to sense proximity is not unique unless the software can do something cool when you move one or more of them far from their starting point or combine blocks from different peoples' sets.

Without built-in GPS or at least wi-fi capability their geographic location isn't going to drive the application, unless there are "base stations" at special geographic locations that can essentially tell a particular block that it has been to a particular place.

Since they can communicate over short distances there are some possibilities when you put different peoples' blocks next to each other, maybe along the lines of a trading card game--sort of a fancier version of Bakugan.

Another possible differentiator is the ability of a group of people to use them simultaneously, either cooperatively or competitively. They seemed to suffer from significant lag though, so I'm not convinced time-sensitive applications such as using them to play music would work that well.