tvaddict, if I understand correctly you want to know not how to create the fade but how to create the background without the characters in. I've got some bad news, you're too late! You have to film the scene without the characters (and again with the characters).

Actually the example you linked to is not very good as the shots with and without (I think he used a still for "without") wre not framed identically - just look at the upright supports and watch one fade in as the other fades out.

Personally I wouldn't use stills as even if they are taken as snapshots of the video the backgrounds will still look different and the effect will not be as great.

I saw a film made by a fellow member of my video/film makers club the other noght where he used this effect extensively. In particular he used is to show him fading in whilst walking along a beach. To achieve this one has to realise that rolling waves are basically cyclic and so he needed to film enough background (no characters) to cover a few cycles. So, you can create this effect even with moving backgrounds if the conditions are correct.

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Tim