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As the guide explains, it is simply an identifier for where the banner goes. In the banner setup you set a location and this is then chosen in the module. This allows you to associate specific banners to that module and, hence, location.
I'm now working on an update that will use the media manager for images but filelist for Flash. It's surprsingly complex but well on the way. Hopefully I'll have something in the next week or two.
I had forgotten that one of the reasons I don't use the standard Joomla image system is that it won't recognise Flash banners as standard so it doesn't achieve what I need. There isn't a standard Joomla field that does what I need for this. It was discussed a year ago by the developers but no update...
The reason it doesn't was that I was playing with using html5 banners and the Joomla image system wouldn't see them so I had to do it this way. Given I didn't progress the html5 issue, I might change it back at some point.
I'm sorry, I'm not sure I understand the problem fully. Could you give me a step by step explanation of what you are doing and what is happening. Could you also let me know what version of Joomla and PHP you are using.