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Personally, I'd much rather have a game that detects my ashi-sabaki and lets me attack with a mouse and keyboard. But I believe that this really had to happen eventually; from there on, it will probably spread like wildfire to every single new sword game.
I've worked on a whole lot of fighting games, including those including grappling. I can tell you, he has a really really big challenge ahead of him. Even assuming that he can get a low latency and 100% accurate control system there are a ton of issues with sword fighting needing haptics to work well, let alone the grappling techniques. The video makes it seem like the big problem is nobody has simulated the physics of swords well. That really the easy part. You could easily do a good job with current in engine tools for most commercial game engines like UE3 or cryengine3. Its certainly possible to take things further than they've gone. Requiring proper edge on hits with enough force is certainly possible. Blocking, etc is certainly possible. All of this is easier with an AI opponent that you can force to react in a physically appropriate way to play input. It will be interesting to follow in any case.
Realistic sword fighting tried in video games once before in (Bushido Blade): The results were mixed from what I remember.
Sounds like it would suffer from the same problem I find with sport games: They are trying to recreate something that you could actually be doing physically rather than through a controller. I would rather run a passing route in real life than play Madden and have a bunch of polygons run for me.
... plus it just looks like a project run by a bunch of out of shape LARPers...