According to this PunchJump article, Sony has decided to sacrifice much of the expensive PS2 hardware compatibility on their machine, and rely on software emulation for PS1 and PS2 games.
"Rather than concentrate on PS2 backwards compatibility, in the future, company resources will be increasingly focused on developing new games and entertainment features exclusively for PS3, truly taking advantage of this exciting technology."
David Reeves, President of SCEE
While software emulation doesn't always have to be worse than direct hardware compatibility, it's very unlikely that there will be any improvements on the older games. Abandoning a commitment to full PS2 compatibility is, in my opinion, a risky move by Sony, but definitely a sign of distress.
As I mentioned in my previous blog post, Sony would definitely have to look at scaling back some of its hardware muscle in order to bring the PS3 into a competitive zone for game consoles. It would appear as though they've begun to recognize that, but it may be far too little, just a tad too late.
Lack of backwards compatibility has been a major thorn in the side of Nintendo's console generations. Part of this is due to Nintendo's long reliance on cartridge media when everyone else had adopted CDs, which made compatibility between generations much more cumbersome... and it's only with the Wii that they've begun to get it right.
Arguably, one of the major reasons the PS2 was able to so fully dominate the home gaming market, was that it played PS1 games so well. This feature is immeasurably popular with users who have amassed a sizable collection of games, and would like to continue playing them long into the next generation. Sony did this better than either Nintendo or Sega could. Sega's console demise was largely predicated on their explicit refusal to offer this feature on any of their consoles. When combined with the shortness of each console lifespan... it inevitably spelled death.
What will make the absence of this feature more stinging to European gamers is that the feature exists on both Japanese and North American units. They will undoubtedly feel as though they're being fed a disabled console, and will quite likely opt to obtain theirs second-hand from eBay, if they're really that eager to get one at all.
What could prove even more disastrous for Sony about this decision, is the fact that Europe, (and particularly Great Britain) quite arguably have the most developed retro-gaming communities in the world. One of the most reputable retro-gaming magazines of the same name is from England. In other words, if there were ever a large geographic grouping of people who would get right pissed at not being able to play their existing older games... it's the one Sony is trying to feed this new limpy machine to.
And with the £424.99 price tag... it leaves one to wonder whether they cut the price at all, after abandoning the compatibility feature, or whether Sony opted to continue ahead with their original price, and hope to recoup some of the horrendous losses suffered after their previous Christmas launches.
They'll reportedly save $40 per console by opting for software emulation over hardware. Of course, the cost of developing games for third-party developers will now increase should they wish to sell their games in Europe or Australia. Part of the reason the cardinal rule of "not changing hardware configurations for consoles - ever" was developed is so that game developers are saved the cost of having to test their games on a multitude of different specs. It's the main cost advantage consoles have over PCs. Sony has seemingly taken steps to eliminate this, not only with the initial complexity of their hardware, but now with new variations of it.
Additionally, how much Sony loses when Europeans and Aussies tell them where they can stuff their little "magic box" is anyone's guess at this point.
Great follow-up article on the Aussie launch here.