Its all software. No hardware changes, thus it will be capable with remaining fully functional with all PS3 software to date. Additionally, it will add the Android functionality; hopefully including a far better browser.
This is similar to when X360 dramatically changed its UI last year.
There's a difference between changing the UI and the entire backbone of your system though. Android is designed to run on ARM processors, and not PowerPC like the Cell is. It would require some pretty dramatic retooling to make it work, not to mention have all the Android apps work properly as well.
I don't think the shift to Android will happen on the PS3, most likely on the PS4, if at all.