Wrong, MS themselves have already said that they intend to target the Core first with NATAL

“Let’s start with the core users to really get their attention and get them invested and committed to us as a platform."

http://www.gamesindustry.biz/articles/microsoft-hardcore-games-easiest-to-sell

Except there is, its called the fitness market, fitness devices and videos show that there is a need

Ok, so you have defined at least one need for Natal.  And it has the capability to satisfy that need greater than any other comparable device on the market.

Again we get back to the issue of values and processes, the idea of a motion camera like NATAL may have the capability to reach out to such an audience, but not the way MS is trying to implement it, see the issue with incumbents trying to bring an innovation is they target it at their core in a way that actually destroys its disruptive abilities, Nintendo when they made Wii fit, actively designed the hardware around the software, with the intent of satisfying the need that I discussed earlier, MS doesn't know how to do that, nor are they even trying to launch NATAL in that manner, they themselves admit they are going to bring it to th e core first then try and move to the "casuals", like birdmen, without understanding the values and processes that made Nintendo so successful.

http://www.eurogamer.net/articles/natal-not-targeting-existing-casual-gamers

Microsoft's Shane Kim has said that Project Natal is designed to target the "60 per cent of households where a videogame console doesn't exist", rather than current casual gamers "or even PS2 people who haven't upgraded".

That doesn't sound like they are mainly targeting their core gamers to me.

I would also like to add that you did not fully include the entire quote that you referenced earlier, so I will do it for you.

http://www.gamesindustry.biz/articles/microsoft-hardcore-games-easiest-to-sell

"It's a continuation of a strategy we've been articulating for a long time, which is that we have a powerful piece of hardware that enables a lot of different experiences," he added. "Let's start with the core users to really get their attention and get them invested and committed to us as a platform. Then as we look to broaden to new audiences, we have the hardware capacity and technology innovation to continue to evolve the experience, whether that's by bringing things like Facebook, Netflix and Twitter to give people more reasons to turn the console on, or with Natal in the future, with a more social, casual and interactive controller-free gaming experience that something like Natal brings."

So to clarify what they are saying, they started by targeting the core gamer at the start of the 360 life cycle to get a foot hold and now they are broadening that experience to new audiences via Facebook, Netflix, Twitter, and now Natal.

^Again, the issue isn't whether they are trying to get the "casual" audience, the issue is how they are going about it, they can say that they are targeting 60%, or trying to make it more social and "casual", but what you fail to note is they are first targeting the core, that's the very problem, you don't target the core and move down to the downmarket, that just proves my point about the wrong values and processes, and why they will fail. Also by targeting casuals, they are admitting a second flaw, they are going to try and use the failing casual games strategy that is crushing the third parties on the Wii, rather than trying to understand what the downmarket wants.

First off, are you under the impression that they are not targeting the casual market first with Natal?

So it is a bad idea to try and extend the 360's audience by providing a unique experience via Natal? Or are you saying it cannot be done due to the fact that MS has already courted the core market and cannot now extend to the casual?

Microsoft are making Natal both the hardware and the software available for the 3rd party developers to develop. In the case of Natal the hardware was created in line with the software without the software the hardware is useless. As the boffin said in his 15 seconds of fame when describing the depth cam and how it defines the points on the skeletal.

What Natal does which is clever is remove the need for a board like we see in Wii Fit but more than that it builds upon it, not only does the camera sense motion but also the depth and skeletal which will only make for a more interesting and more challenging potential for a fitness package. Now whether a 3rd party can produce the software that engages like the Wii Fit package remains to be seen.

Lets imagine for a second. A Natal device could not only record the number of leg raises it could also assess how well the leg was raised. That I believe is the potential game changer element Natal has over the competition.

I think the Natal camera should always be referred to as a depth cam so as to emphasis the difference, maybe then the PS Eye comparisons can stop.

They themselves have stated that core is first.

Actually trying to market to their core first is a bad idea, first off the core are the least likely to welcome the new innovation, if they are willing to adopt it, they'll be Wii owners already, secondly core games are the least likely to benefit from the innovation.

Now when it comes to reaching the downmarket, yes they'll have a hard time, what is a strength to them in the core market are weaknesses in the downmarket, the downmarket has different values, Nintendo already has learned the lessons of the downmarket, its their strength, but MS and the third parties it depends on so much do not, which is why they have such trouble with that audience, NATAL will reflect those problems in its software selection for the downmarket, and the core will see little benefit to NATAL in their own games.