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Chark said:
Uh yeah. Have you heard the rumor of a $70 dongle that provides backwards compatibility to the PS4. Rumor yes, and questionable as to how that's possible, yes, but it has been said.

Other than that there is the cloud solution that would open up the entire library for anyone with a strong enough internet connection. Limited of course.

As for having PS3 capabilities in the PS4 itself, that's a death wish most likely for Sony. Perhaps an elite version, but you will have to pay extra.

My suggestion is, you have a PS3 right? It is still pretty awesome, right? Media hub, huge collection of games, etc. Just keep your PS3.

It's possible because Sony patented the idea several years ago.  It was suggested two years or more ago that Sony might use a module to connect to an unreleased PS3 to provide PS2 compatibility, because at the time the PS3/PS3 Slim didn't offer the necessary (see patent) connectivity/bandwidth to provide such services.

As someone who has been saying this is how they will provide backward compatibility since the day the rumor originally dropped that Sony would be ditching the Cell processor, about a year after the patent announcement, this is entirely possible with the PS4.  What is the difference between building something on board, and putting it into a module that attaches to the console?  None, save for cost. 

Personally I think the PS3 module is the smartest choice Sony can make for PS3 compatibility in the PS4.  The second smartest choice would be introducing the cloud service first, making people realize how much it sucks, thus making them realize the benefit of the PS3 module and forking over the $100 or so for the backward compatibility module when it's made available.

EDIT:

To provide backward compatibility, the module could provide both the CPU and GPU of the PS3, then utilize/piggyback to connect to the input and output functions of the PS4.  So, the PS3 module would utilize the Blu-Ray drive, the controllers, and the outputs (audio, video).  This is essentially how a docking station with a laptop works.  Rather than utilize the outputs of the laptop, the computer utilizes the outputs through the interconnect bus.  If it has a DVD/Blu-Ray player, network connectivity, or mouse/keyboard input it also utilizes those. 

The PS4 would simply go into a standby state while the PS3 module took over control of the hardware.