I really loved this idea and am sad Illumiroom never came to fruition. It makes sense why it never happened, given the difficulty of making it happen, but it's such a cool add-on, way better than the Hue rear illumination... which weirdly stalled out, I would have thought this would be a standard add-on for TVs by now just for the external kit cost in an otherwise stagnated market.)
Disneyland does a lot of this projection-mapping in the park for its nighttime shows these days, and it's a cool effect, and with a game engine instead of pre-recorded footage, there's a lot of options for what it could do.
The concept for what tech would be needed is generally simple; the projector would be a second screen with very limited need of resolution, and you could probably scan the room for initial setup with a phone. Projectors aren't cheap (though they are getting cheaper,) but again, it would only need be low-res and not necessarily max brightness. (In the demo trailer, they also show some options for how could compromise, including switching to b/w wireframe for buildings or just using colored lights as indicators for items on the periphery, rather than the full "go big" experience of a massive projected screenspace.) And the options are pretty wide for how it would be used, from basic action-enhancement to true play mechanics (light or pulses or other signals might be used in a horror game, for instance.)
There's a number of problems with the idea in general though. One is that a project can't "project" black, so you'd always be adding light and glare to the screen. That, and set-up is probably prohibitive in most houses (ultra-short-throw projectors make it conceivably more possible, but those have barely cracked the $900 pricepoint. Also, of course, games or hardware would need to support it individually, which barely happens well with DualSense/HD Rumble even though those features are built right into the packed-in controllers.
Razer was trying to do this back in 2017 too, adding "Project Ariana" to its Chroma line of synced gaming lights for PC games, but it never reached market either. (Judging by the concept, they spent more time on the hardware "design" than the play concepts than MS did, as they have a futuristic-looking projector but their only idea shown is full-screen projection, which IMO looks annoying instead of immersive.)
https://www.razer.com/concepts/project-ariana
Better video of the old Illumiroom concept, with a tech breakdown of a lot of implementation ideas they were experimenting with.