Congrats on the new phone buddy.
Basically you need to use the Sony Ericsson Media Manager on your computer to set it all up, and then the software applies tags to your music saying which type of 'mood' the music is; whether its happy or sad, fast or slow, etc. Then your phone reads this and plays the songs accordingly.
MikLSP did a really decent review of it recently. You should have a read of it.

Its right here:
http://forums.se-nse.net/index.php?showtopic=24211