It works in a similar fashion to how the "Demo Mode" "Demo" folder/file works on video-capable iPods.
If there's a file in root's home directory called Demo.mov, it will play it in a continuous loop. The only difference between the iPod classic's mode and the iPhone/iPod touch's implementation is that the classic iPod has a timeout of about 2 minutes.
Launching it directly would be pretty useless, and so there's no reason to place it on your SpringBoard. Deleting it would be a bit useless, too, as it doesn't take up a lot of space, but it wouldn't hurt anything.
