Given the project's scope and budget for the agency I guess doing this with actual threads would have made it very hard to maintain on site, magnitudes slower and result in a skyrocketing part count. So this compromise is fair and still impressive.

BREAKFAST did a display before which might have been even more impressive: http://breakfastny.com/dot-screen

I too found it quite confusing, I kept trying to figure out where the threads were, was it stitching fabric real time?

Quite disappointed when I saw it was just colored bands spinning. I might have thought it was cool if I had gone in expecting bands, but expecting actual thread, and seeing bands was a let down.

If you look closely, the bands are covered in (multi-coloured) threads.

That's irrelevant. The interesting functionality in this machine are the spools which cycle bands of colored material. If that material were colored with crayons or paint or threads would not change the behavior of the machine or the effect. The texture of the material might slightly change the appearance, but at the scale in the video I doubt it makes a difference, and different textures (e.g., textile) can easily be simulated.