This joypad is made up of four conductive thread pressure sensors. The analog transition between the directions (up, right, down and left) comes from the buffering material (in this case 3 cm thick squishy packing material) that absorbs and spreads the pressure from the user’s pushing, creating a gradual transition between the inputs.
>> Instructable

This Fabric Joypad does not need to be used with the drawing application seen in the video, it basically supplies you with analog outputs that sense which direction (part of the circle) pressure is being applied to.