My very basic understanding of open vs closed loop is that in open loop, the ecu isn't looking to the o2 sensor for feedback info. I believe this happens when you're at, or close to, wide open throttle.
The product moves the location of the MAF sensor to trick the ecu into running the engine leaner. In closed loop, I think this effect is largely negated due to the o2 sensor feedback; however, in open loop, the ecu doesn't get the feedback from the o2 sensor and the engine continues to run leaner.
From what I understand, and I may have misinterpreted, the engine is running overly rich in all circumstances, and the product helps achieve a more efficient tune (using enough fuel, instead of too much). I think someone said something to the extent of running rich improving emissions, which could be a factor in Toyota choosing the tune that they have, instead of opting for maximum mpg and power.
I probably left stuff out.
You are correct on most of what you took away from the conversation except for when the engine runs rich. It only runs rich during open loop, when in closed loop the engine runs at 14.7 to 1 which is mandated by the input from the o2 sensor.