Watching the Project Natal video, I can't imagine wanting to play a shooter like that. Or even worse, playing a racing game with an air "pretend" wheel -- which of course won't have any force feedback or rumble.
To me, it just seems like there's much more immersiveness and sense of realism using tactile controls, not to mention better responsiveness, precision, and opportunity for feedback. It could be cool for some things though, and I'm sure there's an audience that will find it highly appealing.
Although on a more advanced scale, Milo kind of reminds me of the type of player interaction we had with Seaman for the Dreamcast. I bought that game, and while it was interesting to check out, I ended up never actually "playing" it. So yeah, personally I don't see much appeal with Milo, but there will certainly be an audience for it, and who knows, maybe they will be able to something really fun with it.
As with the Wii, these types of innovations/advances are making gaming accessible and attractive to more people than ever before. And even if it's not the way the rest of us would like to play the majority of the time, it at least brings us alternatives. This type of interaction will be great for "party" games with friends and family together for example.
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