OK so the real thing with this one is who should be paying, the customers or the publishers? For me i would say the publishers. What is a demo? an advertisement for a forthcoming game that should convince the customer to buy the game on release. Demos are not long enough and on the whole not good enough to expect me to pay for. Would you pay to sit through 20 minutes of advertising an hour while watching a film? No bloody way would you.

I puzzled by how many people seem to think there actually is such a thing as a free lunch. But no, there isn't. All things are paid by somebody, eventually. In the case of Microsoft and Live, the gold members pay a part, and other paying customers pay another part. I don't know if it's enough to offset all the costs, so there may be other areas where customers are unknowingly paying for a service they are not using.

In case of Sony and PSN, it's a bit more foggy, but eventually it is the customers who end up paying. Money circulates and flows through the system in a million ways.

Now, to assess what this all means: the publisher has to pay more than before, so the publisher either has to cut costs or increase revenue. Given that the service was previously free, it is unlikely the publishers can increase their revenue from the current situation by using the service, so they have to cut costs. They either won't use the service, or they will cut development and/or marketing costs. Since marketing is a big factor in driving sales, it is more likely that they will cut costs from the development. I wouldn't be happy about that. In fact, I'd be happy to pay a bit to be able to use a service that is useful to me.

Another way to look a demos is to see them as a tool for you to check out the game before you invest in it. Do you download demos? If so, why?

 I do, I use them to choose what and when i buy. I downloaded the Hawx game, a game i didn't know about. Enjoyed it so much i plan to get it this weekend. At the same time i downloaded the watchmen game, it was alright but i wouldn't pay full price for it. If these demo's were not there i wouldn't know much about them and wouldn't even think about spending my cash on em. Yes it is a tool to help me to choose where i spend my hard earned money. What is an advert? a tool to help sellers get their product out there and buyers choose where to spend their cash. Who should pay for the tool? in a buyers market, clearly the seller.

In the total dev/marketing budget these days, the cost of the downloads isn't that much. If you may realistically rack up the cost to about 500k (and bigger as the installbase grows), in a 20 to 30M budged, that's 1,6-2,5%. But, it's still a cost that the companies would prefer being in their bottom line instead of being out of it, especially when the companies already pay Sony royalties for each game sold.

On the other hand, i do understand Sonys decision completely. SCE isn't making money and you have to get it somewhere.

About the demos hurting the game sales; it depends what kind of game we are talking about. If the game is a new IP that nobody have heard about (and therefore aren't buying it), the demos will likely get people interested and buy the full game, but established IP:s with lots of hype are only going to get hurt by a demo, due to people dissappointing for the game not living up to expectations/hype.
Then another thing is, that the demo has to be designed correctly. You would need to have a demo that tells you as much as possible about the game, but has as little content as possible, so that people don't play the demo instead of the full game (which also becomes a problem when there's loads of demos available).

In any case, the problem with the demos aren't the demos itself, but the audience that the demos are targeted at and the design of the demos.
The audience who wants (and makes use of) the demos, either wants to "preplay" the game they have anticipated or just want to drop out bad games from the list they've been planning on buying.
For the design, by looking at movie demos (trailers) they are not "the first scene" or "the first five minutes" of the movie, but a few picks here and there, that give you the impression of what the movie is about. Why can't games have the kind of demos? Demos shouldn't be designed as separate from other marketing, but to support it.

A proper way to use demos can be found from Nintendo Channels DS demo service. It has demos for the "new audience" or "new audience games", where the IP:s mostly are new "to everyone" or new "to new audience" (ie. the demos come after the game is released). And what i just wrote about DS demos goes only for 1st party releases.

It's not $160 per download, genius! It's $160 for 1000 downloads if it's 1GB! GET IT RIGHT DUDE!

One thing we aren't taking into account is the licensing fees involved.
If 360 charges 100k and sony charges 5k then there's 95k you're saving with sony right?
Now we just need those numbers to each make or break this case.

Are you talking about the per unit licensing fees? I know that last generation Sony and Nintendo charged $10 per game and MS charged $7.

Sony shouldve charged yearly for PSN just like Microsoft did with LIVE.