So if the details I'm hearing are correct....
Mistake #1: Launching Natal as an add-on peripheral instead of rebranding a new Xbox line with it.
Are they insane? Nintendo pondered launching the remote as a GC add-on peripheral, but wisely decided that this would require an entire rebranding to get the effect they were looking for, hence the Wii. If it doesn't ship with the system, no 3rd party in their right mind is going to seriously develop for it (without moneyhats, I suppose).
Mistake #2: $200 pricetag!
Answer to a rhetorical question: yes, they clearly ARE insane. Not only will Natal be a separate peripheral that must be purchased independent of a $300 console, but it'll cost another $200 as well.
After the moneyhats stop, no developer is going to want to work with this thing due to the extreme amount of risk involved. A separate peripheral that is DESTINED to wind up being relegated to the status of "gimmick" that costs $200 and doesn't have the necessary rebranding to get it into homes as a family-friendly device.
I mean, wow, just...WOW...
Maelstrom was completely correct in his discussion of the "Birdman Fallacy". Here, MS is watching Nintendo do extremely well and can only come away with the conclusion that it must be due to the fact that people love jumping around like idiots while playing games. Ergo, if they release a controller that lets people jump around like idiots, they'll be successful, too.
They have absolutely no grasp of the fact that it was the complete rebranding of the Wii as something that the non-gaming populace would want to own that made it so successful. Nor do they grasp the fact that, after the novelty wears off, motion control isn't a selling point for games.