Embed code is used in third party sites. So if you go to a site and they have a Video that has been uploaded to that site, they can and a lot do give you an embed code. You copy this code and past it to another site or web page and that actual video will then show up in that site you have posted this "Embed Code" too.
A lot of sites do this because they have a number of file types that are supported, such as .MPEG, .mov, and flash videos.
Facebook, Youtube, and certainly a lot of porn sites use this feature for video streaming and file sharing.