Kathleen De Vere’s “source with knowledge of the company’s decision” says Microsoft will phase out its points system by the end of the year, and that the change will affect the Xbox 360, Windows Phones and the Zune Marketplace. Mobile developers are reportedly being warned to plan their downloadable content and in-app purchases around the change in policy. Microsoft, not surprisingly, would not comment.

The current Microsoft points system is ridiculous for two reasons: First, the real-world value of points–$1 per 125 points–is confusing, although Microsoft has insisted it isn’t trying to mislead customers. Second, and more importantly, the points system doesn’t always allow you to buy exactly what you need. You can only purchase points in $5 increments, so you’ll always overspend on cheaper downloadable content, movies or music. (It used to be worse. Until April 2010, Microsoft only sold points in 500 or 1,000 increments, so you’d always overpay on a $5 or $10 game.)

Microsoft has been flirting with the idea of ditching its points system for years. In 2009, when Microsoft introduced full game downloads on the Xbox 360, it allowed users to see the games’ full dollar values, and pay the exact amount. When I asked Michael Wolf, Xbox Live’s senior marketing manager, if this was a sign that Microsoft was moving to direct credit card throughout the system, he said “It’s an indicator that we might, yes.” A year later, Microsoft’s Aaron Greenberg told G4 that dollar-based billing “ is something that we’re looking at.”

Now, I think it might actually happen. Microsoft is trying to turn the Xbox 360 from a game console into a general entertainment hub. If the company wants a broader audience to buy lots of movies and music, and maybe even apps, it can no longer afford to use a payment system that overcharges users and doesn’t make any sense.

To my delight, Kinect now plays a significant role in the dashboard. It’s no longer penned into special menus with limited functionality. Instead, Kinect now allows you to control almost any part of the Xbox 360 with voice commands and motion controls. And it works really well.

Kinect is not like Apple’s Siri, in that it can’t understand natural phrases. You can’t, for instance, say “show me a list of action movies.” Instead, you must say “Xbox, Bing, Action.” and then filter out other types of content. But Microsoft does a good job of guiding the user along. If Kinect is plugged in, you’ll see a little prompt to say “Xbox.” It’s the magic word, showing a list of voice commands and highlighting how to select the content that’s on the screen. You don’t need to pause after saying “Xbox,” but when you do, the dashboard spells out your options so you don’t have to memorize syntax.

The new dashboard itself lends a hand here. Microsoft has thrown out confusing categories such as “My Xbox” and “Community,” replacing them with straightforward sections for Bing, Home, Social, Video, Games, Music, Apps and Settings. Using Kinect, you can say “Xbox (Category)” to jump to the relevant menu.

Also, motion controls are speedier now. You still glide through menus by moving your hand to one side of the screen and then swiping across, but the area of detection is much larger, to the point that I could navigate from one panel to the next with my eyes closed.

Netflix and Hulu both received major updates with expanded Kinect support. Before, the Kinect versions of these apps only showed a small selection of content, so if you wanted to view the full catalog, you had to use a controller. Now, both apps have a lot more categories to choose from. On the downside, you can’t search by voice within Netflix or Hulu, but you can find their content through Bing search on the main dashboard.

Because Kinect works so well throughout the Xbox 360, it’s all the more jarring in the handful of apps and instances where you can’t use voice and motion controls. You’ll need a controller to send messages to Xbox Live friends, adjust system settings and agree to new terms of service, and you can’t use voice or motion to exit a game. Some apps, including Facebook and Twitter, haven’t been updated, so they lack Kinect controls and look outdated compared to the new Metro-style interface.

But for the main purposes of moving around the dashboard and watching TV, Kinect is now what it always should have been–an excellent tool for controlling the console when other controllers are out of reach.

But that’s not stopping Walmart. A leaked flyer, provided to Joystiq, shows that the Xbox 360 4 GB bundle with Kinect will get a $50 price cut to $249 on August 28. The leaked flyer doesn’t show any price cuts for other Xbox 360 models or bundles.

Microsoft has distanced itself from the rollback. “Walmart made an independent decision to implement this temporary price cut,” the company told Joystiq. “We’ve made no announcements about price drops, and do not discuss our pricing plans in advance.”

I buy the claim that Walmart is acting alone. But while Microsoft calls it “temporary,” Walmart’s circular says nothing of the sort. And if the retailer can afford to roll back the price, I wonder how long it’ll be before other retailers — and Microsoft itself — do the same.

My gut still says that any price cuts on Microsoft’s end will be designed to sell more Kinect units, ahead of a big software push for the motion-sensing camera. New games like Dance Central 2 are on the way, and the Xbox 360 dashboard is getting a redesign with deeper Kinect support.

The app, which relaunches on August 25 according to Gizmodo, will let users watch two games at once in 720p, with the ability to pause, rewind and replay each game independently. The second viewing window will also be able to show scores from around the league and replays from the game you’re already watching.

In addition to side-by-side view, the app will have a mini-guide on bottom of the screen with highlights, previously watched games and live updates on other games in progress. Kinect voice commands will be supported as well.

It sounds like a more practical approach to watching sports than the existing ESPN app, whose extra features include voting on favorite teams and milling around with other Xbox Live avatars. I assume it’ll be free, like the current app, to anyone with an Xbox Live Gold account and an Internet service provider that offers ESPN3.

I’m hoping this is the start of something greater. During E3, Microsoft talked about its plans to turn the Xbox into a home for live television, but it hasn’t announced any new content partners besides UFC. Live thumbnails, side-by-side playback and Kinect support, along with the “NuAds” that Microsoft is working on, could help show other networks what’s possible with Internet TV.

But in the short term, I’m just excited to root for Michigan and against Ohio State in separate games at the same time.

Microsoft is calling them “NuAds,” and has walked through a few examples on the Microsoft Advertising blog. During an ad for Coke, for example, the user can say “Xbox Tweet” to share the ad on Twitter. An ad for Toyota might allow the user to say “Xbox Near Me” and find nearby dealerships, and an ad for another TV broadcast might let the user schedule a calendar reminder by saying “Xbox Schedule.”

Don’t worry, you’re not the only one who feels queasy at the sight of more intrusive ads in the name of “audience engagement” and “social advocacy,” but there is a silver lining here: If this is what helps Microsoft lure advertisers — and by extension content providers — to Internet television, then it’s all good.

During E3, Microsoft announced that it wants the Xbox 360 to host live, streaming television, including sports, news and local channels. But only one partnership was announced, with mixed martial arts company UFC, suggesting that many content providers aren’t so eager to experiment with a potential cable killer.

But with Kinect, Microsoft can convince advertisers that they’ll get more for their money on the Xbox 360. Where the advertising money goes, I’m guessing the content will follow. With over 10 million Kinect units sold to date, Microsoft might be onto something.

Getting people to post about a Coke ad on Twitter might be a stretch, though.

Finally, third-party peripheral maker Nyko is trying to solve that problem with Zoom for Kinect, a $30 clip-on accessory that’s supposed to decrease the amount of open space required. Whereas Kinect’s ideal range is 8 feet to 10 feet, Zoom for Kinect reduces the ideal range to between 6 feet and 8 feet.

When trying out the Zoom for Kinect at Nyko’s E3 booth, I didn’t notice any issues with sensitivity. Actually, I was able to get within one arm’s length of the Kinect and still have my movements detected, although players have to stand farther back when more than one person is involved. The Xbox 360 only warned me to back off when I got within a foot of the device.

Zoom for Kinect is nothing more than a set of wide-angle lenses that sit in front of the Kinect camera. The attachment slides over the Kinect unit and locks into place when the lenses match up. The idea is so simple that I’m surprised Microsoft isn’t selling its own version, but I’m glad someone has given consideration to folks who don’t live in luxurious open spaces (read: college students, New York residents).

The Zoom for Kinect peripheral goes on sale August 16.

Kinect, the motion-sensing, audio-detecting Xbox 360 camera that launched last year, dominated the discussion at Microsoft’s press conference. I counted 15 announcements for games that will either support or require Kinect, plus a revamped console menu designed for gestures and voice.

The big showing for Kinect was expected, but I was surprised to see the directions in which Microsoft is taking the $150 peripheral. Several big-budget action games will include optional Kinect features. For instance, Mass Effect 3 will let players bark orders to their AI comrades, and Ghost Recon: Future Soldier will include a weapon assembly mode for swiping in new barrels and stocks.

Some future core games are being designed specifically for Kinect, including Ryse, a hand-to-hand combat game set in ancient Rome and Fable: The Journey, an on-rails action game in which players summon magic with their hands. Less impressive was Kinect Star Wars, a hack-and-slash game that seemed a bit laggy in the on-stage demonstration.

Still, Microsoft’s not letting the casual audience slip away. Kinect Sports is getting the sequel treatment with new games such as football and golf, and a new partnership with Disney will yield Kinect Disneyland Adventures, a virtual theme park with motion-controlled adaptations of popular rides. A Kinect game based on Sesame Street is also in development. I’m not sure where this sits on the casual-hardcore spectrum, but EA Sports will bring Kinect support to four of its games over the next year, including Tiger Woods, FIFA and Madden.

And then, there was Minecraft. Although it wasn’t demonstrated on stage, the build-your-own-world indie darling will land exclusively on Xbox 360 with Kinect support this year.

Outside of gaming, Microsoft will integrate the entire Xbox 360 dashboard with Kinect this fall. Previously, you had to use a special Kinect menu with limited features. The dashboard will also get content search powered by Bing and a YouTube app. Finally, Microsoft is finally harnessing the power of bedroom programmers, who can submit their own Kinect experiments to a new feature called Kinect Fun Lab. Microsoft demonstrated this feature with an avatar scanner and a 3D painting program.

Of course, Microsoft trotted out its usual exclusive games, including Gears of War 3, the rumored Halo 1 remake and an early Halo 4 teaser, but the other big news was an upcoming live TV package for U.S. users — or at least it was supposed to be. Rumor had it that Microsoft would introduce a new tier of Xbox Live service that included cable-like TV content. But the actual announcement was rather subdued, with only vague promises of news, sports and local channels to come. The only content partnership Microsoft announced is with UFC, allowing fans to order live fights and interact by predicting who will win.

After the press conference, I spoke with Mike Delman, Microsoft’s corporate vice president of global marketing for interactive entertainment. He said more content deals are in progress, and insisted that the real challenge for Internet TV isn’t getting the content, but managing it once it’s on your system — hence Bing search and Kinect navigation. Still, there are countless examples of content owners treating potential cable-killers with caution — limited content on Hulu Plus, for example, or only a couple major networks participating in $1 Apple TV rentals — and I doubt it’s going to be much easier for Microsoft.

I’ll be checking out some of Microsoft’s Kinect stuff as E3 progresses. Stay tuned, and use the E3 tag for all coverage from the show.

But given that six months after launch, Kinect’s existing lineup stands at a mere 26 games, Microsoft promise isn’t that bold. Hitting 78 games should be cakewalk, and it’s sad to see the revolutionary controller get such little support from developers and publishers.

Consider Nintendo’s Wii for comparison. The console launched in November 2006, and by year-end, the Wii had 45 games on the market. By the end of 2007, the Wii’s games list had ballooned to 215 titles. And Kinect is actually a faster-growing device than the Wii. After seven months on the market, Nintendo had sold 9.3 million Wii consoles worldwide. Microsoft’s Kinect hit the 10 million sales mark after four months.

Of course, quantity isn’t everything, and the Wii had its fair share of shovelware to boost the size of its game lineup, but I’ve seen no evidence that Microsoft won’t suffer the same fate. Of Kinect’s 26-game lineup, seven games scored a 50 or less on Metacritic, a review aggregation site. Only one Kinect game, Dance Central, scored above an 80.

I don’t hold Microsoft entirely responsible. Third-party developers can be a huge factor in a platform’s success, and so far they haven’t done a great job. Still, Microsoft’s delay in letting indie developers create downloadable Kinect games for Xbox Live Arcade doesn’t help. It’s especially disappointing given the innovation we’ve seen from bedroom programmers.

Clearly, Microsoft has a hit on its hands with the Kinect hardware, but unless it can come up with amazing software to match, Kinect risks becoming the next Wii — a fad — and that’s a shame because the potential is so much greater.

The source supposedly spotted a very early build of the Xbox 360 successor at Electronic Arts’ offices, stored inside a PC shell.

“Quite often when new consoles come around they’re packaged into a PC shell, but actually what’s inside is an entirely new console,” said the source, who Develop described as “a senior, trusted, well-placed” individual who is not employed at Microsoft or EA.

(Props to Develop, by the way, for qualifying its anonymous source with a bit of detail for readers — a rarity in games and tech journalism.)

Details on Microsoft’s next game console are practically non-existent. Develop expects that it’ll have “enhanced support for Kinect with just a couple of alterations,” and the source expects an E3 announcement followed by a 2012 launch, but it’s hard to tell from the report where inside information ends and speculation begins.

Yes, it would make sense for Microsoft to steal Nintendo’s thunder with its own console announcement, but only if Microsoft has something substantial to show. From what we’ve heard so far about the Wii’s successor, both in rumors and official information, Nintendo’s reveal won’t just be smoke and mirrors. Meanwhile, we’ve heard very little about new Xbox hardware, except that Microsoft was hiring engineers in March.

But I’m almost certain that more unofficial information will bubble up as E3 gets closer. Rumors tend to beget more rumors where games and tech are concerned.