Kinect, Microsoft’s recently launched motion capture device for the Xbox 360, has lived up to its reputation as one of the holiday’s must-have gifts.

The software giant says there were 8 million Kinects sold through the end of the year. That’s far beyond the company’s 5 million estimate (which was raised from an initial estimate of 3 million right before the system’s launch).

“This has been the biggest holiday and the biggest year ever for Xbox,” said Ballmer.

Building on that success, Microsoft announced plans to increase Kinect’s functionality. Acknowledging Xbox Live member complaints, the company will add Kinect functionality to Netflix in the spring. Microsoft also announced plans to add Hulu Plus to its Xbox Live lineup – also with full Kinect functionality.

It also dropped hints about an expanded relationship with ESPN, adding more games and features, and announce expanded functionality for the device, which will be able to track the expressions of users – including smiles and eyebrow movement.

Memberships in the Xbox Live service now top 30 million and the company has sold over 50 million Xbox 360s worldwide.

“The Xbox is becoming the hub of your living room,” said Ballmer.