(I still call that "digital zoom", because it gives you longer reach, even if the sensor and the focal length of the lens don't change; we can call it "pre-demosaic, high IQ, digital zoom", if you wish)
Yes, it crops the sensor, it's enlarging pixels, and it does indeed look soft when compared to similar footage shot with a longer lens. But if you don't have that longer lens, it's a very reasonable alternative.
The T3i does not resample from 18mp to the 2mp required for 1080p. It simply line skips, basically every third pixel is used.
In the Tele-Crop mode, it actually just takes the central 2mp's worth of pixel on the sensor. No enlarging, zooming of any sort. It's just a crop, plain and simple.
