First off, the cost to Sony for including the software emulation is very minimal. Though some people have cited the Emotion Engine and Graphics Synthesizer, the combo chip was removed from the PAL design in late February 2007 and cost an estimated $27.
Regarding PS One titles, Sony has told GameSpot that they will be compatible, which is a good sign. But why not extend those compatibility options to the PS2 library? As previously denoted, that software in its present form runs fine on PS3 hardware.
There has also been discussion about choice. For this, we want to remind the readers that the 40GB is currently only coming out in Europe, where their only other option is the soon-to-be-dropped (reaffirmed in a line from their recent press release) 60GB version. The 80GB model is not coming to PAL territories.
But perhaps it is a cost-cutting hardware issue that no one has seen. If that's the case, then Sony would be wise to say so, instead of highlighting the 65 PS3 titles reportedly able to justify the loss or downplaying the importance of backwards compatibility when, as recently as 2006 Sony's Phil Harrison said that "backwards compatibility, as you know from PlayStation One and PlayStation 2, is a core value of what we believe we should offer. And access to the library of content people have created, bought for themselves, and accumulated over the years is necessary to create a format. PlayStation is a format meaning that it transcends many devices -- PSOne, PS2 and now PS3."
Could the software be offered later as a download? That's a possibility, although it would beg the question why the company couldn't have added it originally (barring issues over the non-presence of the PS2 graphics synthesizer chip), as well as if that compatibility software would be provided for a nominal fee.
As it stands, no hardware deterrent has been revealed, and the public relations are doing nothing to remedy that error. Does adding the software during the production of the unit, particularly when other software like the operating system is being uploaded, cost that much more? We don't see it, and we're grasping at straws trying to find a reason for it. (Other than diverting PAL gamers' money from buying last-gen software to new-gen offerings.)
So what's the big deal - why does the backwards compatibility matter? The previously-mentioned "core value" quote from Phil Harrison best sums it up, that with the PS3 we are buying into the PlayStation brand and all that it entails. Gamers who pick up the 40GB model have lost access to over 8,000 titles - many of them the best gaming has to offer. The elephant in the room is that Sony could ween out backwards compatibility from all its available models over all regions. Should you care? We think so.
Update: With some help from Engadget Japan's Ittousai, we have found diagrams indicating the switch from Emotion Engine + Graphic Synthesizer chip to just a graphics synthesizer chip, implying the software emulation was partially hardware-supported (as noted by many commenters). If that's the case, then, the ability to download emulation software later may not be possible. We don't want to spread misinformation, so for further clarification we have contacted Sony for a definitive answer.
Regardless, the loss of backwards compatibility marks a paradigm shift in the PlayStation branding. If you buy a PS3, your connection to the previous generation - one that saw Sony reign mightily in the realm of console gaming - is severed. Does the cost of branding outweigh the financial benefit of losing a graphics chip?