tk1989 - PS1 games on the PSN range from 200mb to 650mb. Some of them dont compress at all. And the small ones... I dont think filled up the CD.
But what did they use the space for in the PS1 era? Redbook audio? MP3 it, problem solved. FMV? I don't think WiiWare games are going to be laden with FMV, these are indie developers we're talking about.
You could fit 20 100 MB games on a 2 GB SD card that costs you $25. That's way cheaper than a hard drive peripheral and it's enough space.
No, the PS1 uses its own sound format that can actually have the song sound like the original version yet take up less space than an MP3. Not that PS1 games will be coming to the Wii or anything (or that you suggested it), but what you're asking doesn't really work. Download some PSF files (PSX music extracted from the game disc) some time. What you'll find are files smaller than MP3s that sound the same as if you bought an OST for the game. Really, PlayStation audio is top notch and very space efficient.
To put it simply, you cannot save space on PSX games without straight out compressing them. That won't save much space due the nature of games in general, and it will also mean that the machine has to work much harder to play the game for you. So, in the end, there's no way in hell you're going to be seeing games on the level of the more popular PS1 games on WiiWare if games have to run off of the internal memory. No FF7s, no MGSs. They are simply too big to fit even with advancements in compression.