Microsoft created something wonderful with its Kinect technology. The high resolution camera inside the Xbox 360 add-on had a knack for detecting movement of individual fingers, meaning that it could read sign language. Kinect sported its own on-board processor in order to take the burden off of the console's base horsepower. Based on hearsay and early reports, the original Kinect prototype was a fantastic invention, but then reality set in and in order to hit the target retail price of $150, something had to give. The high resolution camera and on-board processing power had to go. What's left is, as Kotaku notes, "dumbed down" in the name of cost efficiency.
The original Kinect had a much higher resolution (over twice that of the final model's 320x240), and as such, was able to not only recognise the limbs of a player as the current model version can, but their fingers as well (which the current version can't). And when the hardware could recognise fingers, it would have been able to read sign language.
But that capability came at a cost, and while Microsoft had always intended Kinect to sell for $150, "dumbing down" the camera would have meant that Microsoft wouldn't be losing as much money on each unit sold, an important point should Kinect prove to be a failure. So dumb it down they did, reducing the camera's resolution (which in turn reduced the number of appendages it'd have to track) and placing the burden for some of the device's processing on the console and not Kinect's own hardware.
This isn't the first time that the original vision for a peripheral was sacrified for the marketplace. Nintendo's Wii MotionPlus technology was deemed too risky and expensive to include when the Wii launched in 2006, while back in the old days Sega slashed the 32X's capabilities until it became largely pointless (yet still overpriced, paradoxically enough). Let's not even start on all of the features that the Sony PlayStation 3 has lost in the name of driving down the console's manufacturing cost since it launched. It's a shame that Microsoft had to sacrifice so much of what made Kinect potentially more impressive, but here's hoping that if the add-on sells well, we'll see the better camera and other removed components back in a future revision of the hardware.