That youtube video actually uses back EMF from the LED’s themselfs and no photo diodes. Back EMF is where some voltage is induced in the opposite direction, in the LED’s case by catching some of it’s reflected light. Though, you would need sensitive equipment and some decent electronics knowledge + expensive gear like an oscilloscope to even think about making one.
I really like the capacitive touch idea also. If you could make and sell various sized grids for use in LCD’s, so long as they support the values of which this multitouch community is all about, it could be a good thing.
Also, I think that cameras and IR light is the only way to go if you want to scale up past a certain point. But for everyone who is happy to build somthing which is LCD sized, it’s a great idea.
Please let us know how your progress goes!
