Nintendo really should have cut its losses yesterday and cancelled its E3 press conference after Microsoft’s (MSFT) Project Natal demo. How could it possibly have trumped Redmond, Wash.’s controllerless game control system? Certainly not with the Wii Vitality Sensor it showed off today.

The peripheral’s big gaming advancement? It records a user’s vital signs. A nice addition to the Wii Fit, but a far cry from Microsoft’s efforts to turn gamers themselves into controllers.

As I said yesterday, “sucks to be Nintendo.” And today, it most certainly does.

I’d hate to be Nintendo right now. What can it possible demonstrate at E3 tomorrow that will surpass or even match the gesture control gaming technology Microsoft (MSFT) showed off on Monday (see video below)?

Project Natal, as Redmond has codenamed it, is a controllerless game control system. It uses a 3-D camera and an array of motion sensors to capture player movements and translate them into in-game actions and, judging from this morning’s demo, it works quite well. Microsoft says Natal will support voice and facial recognition and multiple players by the time it launches. Just when that will be is anyone’s guess; it’s unlikely to be in 2009.

Lucky for Nintendo, because this is going to make the company’s WiiMote look like a clumsy old Atari joystick.

“The next step in interactive entertainment is to make the controller disappear,”said Steven Spielberg, who was on hand today to promote Microsoft’s new technology. “With ‘Project Natal,’ we’ll see games that bring everyone together through technology that actually recognizes us…this is not about reinventing the wheel–it’s about no wheel at all.”

It’s also about innovation–something we’ve seen an unusual amount of today from Microsoft first with Bing and now this. Could it be we’re witnessing the reinvention of Microsoft itself here as well?

It’s hard to believe that the handful of announcements made last night will gain it much truck in the next-generation console war, but you never know–especially the way things are going over at Sony.

So what were the announcements? A bunch of knock-’em-down, shoot-’em-up, carjack-’em-and-run-’em-down Xbox 360 games like Madden NFL 08, Halo 3 and Grand Theft Auto IV. And a new Fisher-Price-looking controller called “big-button pad” that’s meant to be less intimidating to new gamers. “For the Xbox 360 and the industry to grow, you’re going to need a lot more social experiences that are not intimidating and easy to jump into,” said Shane Kim, corporate vice president of Microsoft Game Studios. “That’s what we’re doing with the big-button pad. You realize it’s something that’s not intimidating.”

Nope. Definitely not that. Looks like a big baby rattle … or something you might find at Good Vibrations. Anyway, Microsoft is packaging big-button pad with Scene It?, a trivia game similar to You Don’t Know Jack, presumably in the hopes that it will loosen’s Wii’s stranglehold on the casual-gaming market a bit.

In the end, Microsoft’s E3 event was most notable for what didn’t occur. The company did not cut the price of the Xbox 360, as some had speculated it would after Sony slashed the price of the PlayStation 2. “We feel really good about where we’re at right now,” Kim told the Seattle Post Intelligencer. “Of course, we’re always going to be looking at those opportunities. But we’re certainly not feeling any pressure to react to anything that Sony has done.”