Following the departure of two band members, the band regrouped and redirected their sound for their third record. Departing from their previous work, the Banshees incorporated synthesizers and drum machines for the first time. They particularly experimented in electronic music on a couple of tracks: the electro-dance minimalism "Red Light" and the atmospheric synth-based piece "Lunar Camel". Kaleidoscope also marks the debut of guitarist John McGeoch and new drummer Budgie.
Kaleidoscope was released on 1 August 1980 by record label Polydor. The album peaked at number 5 in the UK Albums Chart, the highest position the band has achieved to date.
The reception from critics was positive. Paulo Hewitt of Melody Maker's Paulo Hewitt praised the album, and qualified "Paradise Place" and "Skin" as "classic Banshee pieces. Hypnotic, relentless and incisive, both feature Steve Jones on guitar, revealing a hitherto unknown side of the (S)ex-Pistol". Their work on the singles "Happy House" and "Christine" was also hailed shortly after their release by peers The Jam: singer-songwriter Paul Weller said that both songs used "some unusual sounds", while drummer Rick Buckler qualified them as "innovative".
In his retrospective review, David Cleary of AllMusic described Kaleidoscope as a "strong record" with "extraordinarily imaginative production values, featuring intricate synthesizer-flecked arrangements; psychedelic touches in "Christine", spaceship synthesizer swoops in "Tenant" and rhythmic camera clicks in "Red Light" all enliven their respective songs".
Kaleidoscope had later an impact on several critically acclaimed musicians. The Cure frontman Robert Smith cited the album to Steve Sutherland in 1985 when describing The Head on the Door: "It reminds me of the Kaleidoscope album, the idea of having lots of different sounding things, different colours."
What is it about "Happy House" from a guitar player point of view. For start, it's modern. It's not going in any of these creaky or rock'n'roll aspects to it and it still sounded like the Banshees, or even more so. That's when I really began to become a fan of John McGeoch. It was a extra bonus for me. They had got a great guitar player who had left another band and came in. Not surprisingly, that to me was a very good scenario. I've always liked that. It was like get John's best on the guitar.
Santigold said that she took inspiration from the song "Red Light": "'My Superman' is an interpolation of a Siouxsie Sioux song, 'Red Light'", she explained. "I love her song and I love this song." Santigold also later sampled another song off Kaleidoscope, "Lunar Camel", on her Top Ranking remix album. Jeremy Jay covered the same song on his Airwalker EP.