> For what the demo actually was, Miyazaki's reaction didn't make sense.
Hard disagree. Miyazaki explains his position in the video (reminded him of a friend with disabilities, etc). Plus there's an aesthetic and art sensibility to his opinion; this is Miyazaki, not just any other author. The failure was probably on his subordinates, they forgot who they were demoing to.
It's like showing a 3D game demo to someone who fundamentally dislikes 3D in games (or gore to someone who dislikes gore, etc). I mean, sure, it could land... but most likely it won't.
It doesn't really say much about AI in general, this was Miyazaki's personal take and an amusing quote that is too much fun to resist mentioning.