1. Backwards functionality costs money, and they can't afford to increase the price any further. With microsoft cutting prices all the time, they needed to keep up with the costing, and some things needed to go.

2. The PS2 is still selling relatively well for a 9 year old console and its profitable unlike the PS3, which is selling at a loss. If they put full BC on the PS3 now, they would see PS2 sales die down along with profits.

3. They're on a wait and see basis, probably through this holiday season, waiting whether PS2 sales will die down completely. Unlike microsoft, who turned their backs completely on the original xbox, sony still sees life in the PS2.

4. PS2's fully advertised backwards functionality came with a rapid decline of PS1 sales, which was ok since the PS2 had virtually no competition on its time period. Nowadays, however, PS3 is in third place so they'd rather have two consoles out there selling individually.

5. Lots of people don't know a thing about backwards compatibility and majority of them already own a PS2 already so they could care less about it.

so yeah, basically when the PS2 finally stops selling consistently, i'm pretty sure they'll put BC on the PS3. until then, with all these reasons and others combined, there's just no reason why they should.

Sony has said that they didn't remove BC to lower hardware costs.

 PR mate.

Backwards compatibility wouldn't be "Bad Business" had Sony been more clever with how they handled the PS3 ...

Their decision to use the Cell processor in the PS3 had as much to do with Sony looking to pay for the development of a high end DSP for use in their electonics as it did to produce a powerful processor in their console; this was heavily talked about by both Sony and IBM early on, and was one of the main reasons they made the (moronic) claims that your PS3 could share processors with other devices to produce better in-game graphics. The problem with this approach is they ended up abandoning their existing architecture in favour of an exotic architecture which wasn't well suited to emulating their old hardware.

The other problem is their console is simply too expensive to capatalize on the backwards compatibility ... Had they positioned the PS3 in the same price range as the PS2 was, a lot of people who were replacing their broken PS2 would choose to spend the extra money to get a PS3; this is exactly what happened with the PS2.

yeah man, that's why i put "at this point in time" at the thread title.

That was pretty good reasoning. But you forgot number six, which (definately is one of the biggest factors and Sony even admitted it themselves) is to boost PS3 software sales. People liked to play their PS2 games upscaled, and replace faulty PS2:s to play their old games/new PS2 games, instead of buying PS3 games.
If PS3 would have kept the BC, it would propably have bigger hardware sales, but software sales may had been lower.

I can think of a way they could have had BC AND make money. Sell BC on an expansion card/software. However it's too late now.

this is a dead horse that sony fans have ridden to long, face it it is an important feature when both of your competitors are offering it as a selling feature

@FishyJoe: Can you imagine them making money with PS3 even without BC?

isn't that what they're doing right now?