You would have to ask the same question regarding the failure of the Virtual Boy and Nintendo. Virtual Boy was released in 1995, a year before the release of the Nintendo 64, and it did not seem to hit Nintendo hard, if at all when they discontinued a year later.
What failed with the Virtual Boy was the entire concept of a system where you look through goggles to play games. If Kinect fails, it will confirm suspicions that the mass market is not ready for a controller-less video gaming experience.
The concepts fail, the companies take the financial hit, and the industry goes on as usual. If anything, who will hurt most is those within Microsoft who envisioned Kinect, those who are putting their resumes on the line with Kinect, and those VPs who have supported Kinect tooth and nail.
I don't think it will hit Microsoft's hardware sales, it will definitely destroy hardware projections based on the success of Kinect. If anything, the ultimate good may arise out of the failure of Kinect via Microsoft getting more serious on 1st party games and developing new IPs to compete.
Basically, if Kinect fails I will not be surprised if Microsoft counters with a flurry of 1st party software. If Kinect succeeds or muddles the ground just above Kinect, then Microsoft will focus on software development for it and tweak it for future console generations.
