The stage demo showed the Kinect being used to wake the console from sleep at a moment's notice, which would mean it's always listening for such commands. That raised privacy concerns, and Microsoft has responded assuring robust privacy settings and the ability to turn the system off entirely.
"We are designing the new Kinect with simple, easy methods to customize privacy settings, provide clear notifications and meaningful privacy choices for how data will be used, stored and shared," a Microsoft representative told Kotaku.
"We know our customers want and expect strong privacy protections to be built into our products, devices and services, and for companies to be responsible stewards of their data. Microsoft has more than 10 years of experience making privacy a top priority. Kinect for Xbox 360 was designed and built with strong privacy protections in place and the new Kinect will continue this commitment. We'll share more details later."
The rep also claimed the Kinect "is not always watching or always listening," and said that you can turn the system completely off. Presumably he means without unplugging it.