I don't know why so many people think that discontinuing the PS2 will help PS3 sales.  People who are buying the cheapest system will not suddenly want to pay THREE TIMES the amount for a PS3.  Especially when they can get a Wii or 360 for cheaper.  It is not gonna happen.

Adding BC back to the higher end model (160GB) is a good idea.  A bigger HD + BC for $100 would make Sony money as well as help differentiate the high-end model.  At the same time, the production cost of the low-end model would not increase from adding a feature that many do not want.

Although I would like a PS3 with BC, I don't think it would boost sales. PS2 software sales are dropping quickly and their retail floor space is also shrinking so interest in PS2 games is declining. It might draw in existing PS2 users looking to upgrade, however, they can buy the competition and a replacement PS2 for cheaper than a PS3.

Software BC should be released (if possible). Sony then could flood the PSN with their PS2 library. The cost would be minimal and the potential revenue would be substantial. However, I don't think software BC is possible (due to the required memory bandwidth) and because there are no downsides that should have prevented them from implementing it.

Ask Sega.

This would definitely add value to the high-end model (which sorely needs it).  However, it would eat up the small profits (or increase its losses) on each high-end SKU sold.  It would be nice to have the option but the R&D cost would need to minimal for this to be worth while.

http://www.businessweek.com/innovate/content/dec2008/id20081229_857029.htm

(Excerpts from Business Week - Link for full story)

How to Save the PlayStation 3

Sony finds itself playing a fierce game of catch-up with the competition. Here's how it can reclaim lost territory

By Grant Holzhauer

Last generation, Sony set the bar. Despite being the underdog in horsepower and built-in Internet capabilities, the PlayStation 2 shattered sales records and was the clear victor of the console war with Microsoft and Nintendo. This time, plagued by an expensive price tag and other issues, Sony finds itself playing a fierce game of catch-up with the competition. It's time for the company to reclaim lost territory. Here's how it can do it.

The All-in-One Box
Even though Sony has its own movie and television studios, Microsoft was the first to launch a movie download service and most recently inked a deal with Netflix. Sony's online movie catalogue is still in its infancy, with even fewer movies available in HD, and the price is high for a digital-only copy of popular movies ($15 for Batman, really?). Sony should be the leader in this realm............

Home Sick
Home was supposed to be Sony's answer to Xbox Live. Arriving late and still in beta, this is not exactly what we hoped for...... Instead of a grand evolution of online connectivity, all we have is a glorified chat room. If it wants to compete with Microsoft's New Xbox Experience, there's still time, but we have short attention spans.

Indie Gaming
With Microsoft's realized XNA program and the cheap development costs of working with WiiWare, we're seeing a much greater number of games coming from independent and small game developers. On the PS3, however, new downloadable releases are rare.Sony should stop flexing its muscles a bit and show more love to the little guys.

Try Before You Buy
Microsoft stipulates that each game has a demo, but couldn't Sony require the same thing? People like free things, and if Sony would be more generous, people would probably open their wallets.

We Still Love the PS2. Sony made a horrible mistake by nixing ability to play PS2 games from the current PS3 models and needs to address this issue. It should start by offering PS2 games for download on all those massive PS3 drives.

Don't Forget Your Roots
Once upon a time, if you wanted to play a Japanese role-playing game, you'd have to own a PSOne or PS2. What was once a staple for Sony is now a rare treat.

Despite having its own MMORPG studio, Sony has not released a single one for the PS3 (with The Agency still a ways out). Sony, you need to get back to your roots before they dry up.

The Death of the Exclusive
Sony needs to work harder to score exclusive content.

Money Doesn't Grow on Trees
Although the PS3 is an amazing piece of hardware, many people cannot afford Sony's $399 base price. Sony, you have to be in touch with gamer's wallets. And while online multiplayer gaming might be free on the PS3, you're charging for things like Qore, even while Xbox Live is offering tons of video and preview content for free. With a cheaper console, you'll sell more games. That's the only way you're going to be able to recoup the cost of the hardware.

Streamline the Online Experience
The PS3's community platform, despite Home's rookie efforts, needs a lot of work. There needs to be a unified online interface, one that doesn't require that you spend five minutes logging into Home to access Get the system up to snuff fast, or people are going to stop waiting and move on. We know that you can do it, but we refuse to wait long.

I'll play Devil's advocate and go for the extreme solution. Please note, I do not pretend to have enough technical knowledge to even know if some of these ideas are doable.

Looking at the Wall Street Journal I think Sony is in considerable danger of losing the resources to stay flexible and in a real danger of becoming buyout bait or worse. Therefore I think a complete change of strategy is called for. In hindsight, the suggestion that the PS3 be recalled for a do-over at the start might have been a good idea but it's too late now.

Given that, I think that it must be kept as the penultimate elite gaming machine without any compromise or stripping of features. Charge whatever you have to the sell it at least as break-even. It will not ever be, in itself a money maker but at least it'll be a flagship to maintain the Sony Mystique for the future.

Then create a separate console with more modest features that can be produced competitively. Somewhat in the model of Nikon which has the D-3 series, very full featured, very elite, very expensive while they make their real money on the D90s, D300s etc which sell better because the D3 elevates the entire system. I realize that the new console would have to use some subset of the current cell design to be compatible but there must be a way to have a scaled down version capped at 720p. A lot of games are essentially that anyway and no one   minds so perhaps they don't need to buy the power to play the few 1080i games.

Then for the PSx (whatever name it's given) dump the DAMN BLU RAY, it's still jacking up the cost. Basically the games would be ported over to the lower resolution (I should think relatively easy) and put on nice cheap DVDs and cost a few bucks less. The hard core will still want the REAL PS3 and the new recruit will aspire to graduate to it ASAP.

As soon as the PSx is out, kill the PS2 and start putting its library as downloadable content ala virtual console.

Then keeping the PS3 for status and to remain the gold standard, getting market share and actually cutting a profit with the PSx and leveraging the huge PS2 game library to give a huge selection you could start filling in that huge debt hole and be in a healthier position for the next go around.

Just what I'm thinking; it may  be completely unworkable but a show of gimping the PS3 in desperate cost cutting measures only adds the stink of death to the system and will only hurt sales more.

I don't get it gearbox... what's a smart move to you??? Cutting price to sell more and lose more??? Even if the make a gimped model, just how gimped would it have to be to sell at a profit with a price tag of 299??? If buy some miracle it was selling at 3$ profit how long would it take recoup all the loses..... let's not forgot how much money SONY needs to through into advertising, game development, etc.

I don't know what a smart move would be. Perhaps a weak [but not as weak as what's in the OP] model.... but I don't expect the price to go under 399.... 350 the minimum. A smart move for SCE right now would be something leading to decent overall Net Income each year, not just more Systems sold. Focus on getting the business on the up then figure out how to get your brand back at the top.

Take a page from Nintendo, they made it through the last to gen's losing to SONY by leaps in bounds when it comes to hardware numbers their business still made a nice solid profit on the N64 and GameCube.

Smart move would probably involving the assessment of the value of having a game console when they could just be third party developers.

All their problems come from trying to manage hardware, not software. They do just fine with software.

I think Sony should

A. Cut the price on ps2 down to 99$ and see if they can create an interest in software and hardware that is purely profit instead of letting it fall off the map Starting in April.

B. Add PS2 BC to help stimulate interest in that software and sell it online to avoid having to deal with distribution costs

C. Lower the PSP price point to $139 to $169(as opposed to $169/199) to help stimulate even more interest. Make sure it happens when a big title is on the way such as an FF spinoff or a good Capcom release(Next Monster Hunter or DMC or RE if rumors are to be believed)

D. I believe they are really trying to get more software for the PSP this year and I believe the access to the PSN and digitial software is the the way to go to make their little profitable portable venture even more so. Though they badly need a music store

E. Do not drop the PS3 price until September or October but do so by a $100 with release of a massive game(Hopefully GT5) .

F. Sony's biggest problem this gen is their advertising not their offerings. If Apple and Nintendo are anything to go buy they should simply show people of many different backgrounds having a ball to make their product cool and hip. A few exist and I think they are slowly moving in the right direction.  Here are some decent examples.

http://www.youtube.com/watch?v=ZVa0B3cjLII

http://www.youtube.com/watch?v=Vc08aKTKSJo

take out wifi. bluetooth or whater its called. wired controlers as standard. only have hdmi internet n sd connections in the back. use buttons instead of touch sensitive have 1 usb with option for expantions off all the missing features at a later date. sell the gimped model for about 50 pounds less then standard because profit is most important