We're not talking about Sesame Street video games (though they're doing that too). They also want to make the show—filmed puppets and all—a TV show that a kid standing in front of their TV can interact with.
You don't have to imagine what interactive Sesame Street would look like. Microsoft made a "vision" video of it. You can see that right here. But because it's a "vision" video, it's not really all there. We're seeing Microsoft's dream version of what this would look like, all dependent on a TV tethered to an Xbox 360 and a Kinect visual/motion/audio sensor.
Microsoft is trying to make this vision reality. If they nail it, well, I bet we'll see plenty more TV shows that can react to us. Microsoft's already getting the National Geographic in on this too.
I'm hoping they'll make comedies that get funnier if the Kinect senses that I'm not laughing at the show's jokes.