Really? I mean, really? If this wasn't E3 I'd say this was a bad joke. There's no one who could convince me that Milo demo wasn't scripted. Not only did the kid say everything without a hitch, but there was less than a half a second between what she said and the response sometimes, and that's too little to not only differentiate between a pause and an end in command, but process the entire thing. Which means it's either scripted, or runs off keywords, a little like my interactive R2-D2. He'll light up different lights or move in a certain way depending on what words he interprets. For instance, the manual instructs you to say "Do you remember (slight pause) Luke Skywalker?" but you can get away with saying "Remember (slight pause) Luke". All the other words are extraneous. Which would also mean severely narrowly scripted dialogues. Also, in the video with the family playing it, there's no way it could recognize proper shifting when the chick is racing.
Plus there's blatant issues about controlling certain actions. How would you move in an RPG? How would you look, move, and shoot in an FPS? How far do you go forward before you stop moving forward, but not move backwards, but still be in the operative range for the device? For instance, if you're walking down a hallway in game, but need to stop moving to let traps go by, how do you stop? If you take a step backward, you move backward, but what if the hallway is at all long? You end up walking into your TV. Perhaps a gesture to let the game know you need to reposition yourself? Isn't that kinda gimmicky, and not a solution to the problem at all? You'd have to walk in place, but you can't move out of the ideal range of the device. And for things like soccer, or a fighting game, staying in one place (in reference to depth) is just awkward.
So that relegates to games where you are only moving left or right. All your sports games? You can now only play goalie. Not only that, but if you do happen to move out of the range even slightly, it's going to severely affect how the game interprets your movements.
The only way I can see this working with current technology would be to have something like what they (used to?) use with mo-cap. Sensors physically placed on the body to accurately record what your body is doing. But even with that, hell, even if they had 8 Project Natal units to 'fully capture' what a subject would be doing, you'd still run into the same forward/backward issues. And the same control scheme issues. As far as game control goes, the only possible way for this kind of idea to work properly, would be a holodeck. And it still kills things like RPGs.
It would be fine for simple rail shooters (Police 911 would be about as complex as it would get), and you could get a crude vehicle control. I'd rather be holding onto something that would give me force feedback. I'd rather take one of those cockpits from those Gundam arcade games than some sort of 'controller-less' gaming.
The voice recognition and commands are cool, and it's nice to see that trying to be implemented in a console. I mean, how many of us would kill for our console of choice to recognize "Eject"? And the conference calling as well, but these are hardly revolutionary.
And it's Molyneux, so you can take 50 if not 75% of what he says right off the bat as not being in the final product.
Even if they were somehow able to get a proper sense of control, without awkwardness, they'd run into yet another problem. I think I remember seeing this on some video game news site (I dunno which one, it was awhile ago, and I may be dead wrong), but there was a company trying to develop a sword fighting game for the Wii. They found that to be a successful player in such a game, you had to know how to fight with a sword. So even if they could make non-gimmicky games, with perfect movement control, you'd have to be able to move just like the character you're playing. Can't run like a professional football player? And well you shouldn't, because if you could, you'd be one. But have fun failing at the game.
It's also funny to see Wii bashing in this topic, since the Wiimote is a practical, actualized version of what Natal is trying to do, at least as far as the motion control is concerned.