Microsoft has unveiled its new control system for the Xbox 360, at the E3 Expo in Los Angeles.
Project Natal is a fully hands-free control system that will use face recognition and motion sensors to allow users to play games.
Film director Steven Spielberg, attending the launch, said it was "a window into what the future holds".
Although still in the early stages, Microsoft has sent prototypes to all the main game developers.
Speaking to the BBC, Mr Spielberg said he had always stated that "the main barrier stopping people getting into video games was the complexity of a games controller," and that Natal was "a whole new world".
"There is technology now that recognises not just your thumb, it recognises your entire person. The technology knows who you are," he said.
Mr Spielberg drew an analogy with the film industry, saying it was evolutionary step for games.
"It's like the square screen we saw all of our movies on in the early 1950s. Then The Robe came out in Cinemascope. And then came CinRam and Imax followed. That's what this [Natal] is.
During the demonstration, British developer Peter Molyneux showed how Natal could not only recognise faces, it could recognise facial expressions to determine what mood a player was in and react accordingly.
Mr Spielberg said this offered new opportunities for game development
"The video games industry has not allowed us the opportunity to cry, because we were too busy putting our adrenalin rush into the controller, or wherever we swing our arm with a Wii controller to get a result," he said.
"Because of that, there is no room for a video game to break your heart. We now have a little more room to be a little more emotional with Natal technology than we did before."
Speaking to the BBC, Piers Harding-Rolls, senior analyst with Screen Digest, said the success of Natal depended on a number of different factors.
"I think the technology looks very interesting but its success depends on the content and how easy it is to use," he said.
"The other aspect is cost and how they will get it out to the user base," he said.
"That said, I think Microsoft would like to get it out sooner, rather than later.
"Sales of the Xbox 360 hit their peak in 2008 and are now expected to decline, in terms of console sales, so you would expect them to get it out as soon as possible to rekindle interest in the platform."
The details of Project Natal had already leaked out a few weeks ago when the US patent office released documents, filed by Microsoft, of a "motion sensor that makes use of face recognition software and biometrics".
At the time, most experts believed that Microsoft were patenting concepts, rather than an actual application, and would focus on a motion detector similar to the Nintendo's Wii controller.
Speaking to the BBC, Shane Kim, Microsoft's Cooperate Vice-President of Xbox Strategy and Development, said they were worried the story was going to break before the official launch.
"Most of the information was out there, but no one was able to put the full story together," he said.
Project Natal was not the only big announcement from Microsoft.
The company unveiled 10 new games for the Xbox 360, including Beatles Rock Band, Call of Duty: Modern Warfare 2, Tony Hawk Ride and Final Fantasy XIII.
Tony Hawk Ride comes with its own skateboard controller, similar to the Wii Balance board, although this is the first time such a device had been available for the Xbox 360.
Tony Hawks, who was at the launch to promote his game, said it was something he had wanted for some time.
"I always wanted to do a game with a skateboard controller but the technology wasn't there until now," he said.
"It will allow anyone to grind rails and catch big airs; even if you have never been on a skateboard, it will let people achieve skate supremacy in the comfort of their own living rooms."
And in a follow up to the news that Microsoft had tied up a deal with Sky to show content via Xbox Live, Microsoft said they had entered a joint agreement with Facebook and Twitter to create what Mr Kim called "full integration between three of the largest social networking sites on the planet.
"For us, it's a very big priority to make Xbox live the next generation of social networking," he said.
Both Nintendo and Sony consoles stream video content using the BBC iPlayer.
Mr Kim played down allegations that Microsoft had opted to team up with Sky purely to differentiate themselves from their competitors.
"Our partnership with Sky is about bringing great video and entertainment to our UK customers. That was our focus," he said.