The point is that if developers can push higher resolutions like 1080p, it means that most probably, RSX has time to spare (waiting for data to come from Cell, so it could also be a bandwidth issue like you say). So instead of leaving the RSX idle, they just go for 1080p.
*snip*
This is all in my opinion from info we hads around here, i'm sure real developers could explain this much better than i can.
I think it's much more simple than that. Most good developers always take care to develop something for an understated performance target. While this holds double for games, I myself even will prefer to develop a basic office application on an old piece of crap PC, so that I can get a good feel of where my application is hitting bottlenecks. If there are unsurmountable ones on that PC, fine, I can still fall back on higher performance PCs afterwards, but most slow bits usually just fall down to sloppy/inefficient coding.
In the games market, performance is everything and you'll want to use all the available performance you have, but if you don't know what you'll have exactly in the end, you use a fair margin of error. If early developers for the PS3 did the same, the final hardware should nearly always perform better than their worst case scenario, in which case they have performance to spare.
Now comes the point at which they can figure out the best way to spend the extra performance. One really easy way would be to render at a higher target resolution. If you can achieve this without sacrifices, it is typically an easier way to scale your application's performance upwards than adding new effects.
But make no mistake, there will also be developers who make the choice early on between targetting 1080p and 720p. They will weigh the benefits of either against the amount of effects they need and so on, and the improved looks that 1080p affords. You can say whatever you like, but with most screens on the display area being fairly large, 1080p can indeed make a lot of difference. Someone's argument about the amount of extra memory it takes being 2.25x that of 720p, well, that also means the on-screen detail is that much higher. Now let's put up a little formula to quantify this.
Let's take a few example screens. I have two wide-screen displays that I use frequently for gaming.
One is my PSP, the other is my 82cm Philips 100hz SDTV Widescreen. Let's pick up on the relevant factors here:
Size of screens
PSP: 9.5x5.4=51.3cm
TV: 68x38cm=2584cm
Resolutions
PSP: 480x272=130560 pixels
TV: 1280x720=921600 pixels
TV: 1920x1080=2073600 pixels
Pixels per cm
PSP: 2545 pixels
TV 720p: 356 pixels
TV 1080p: 802 pixels
So, viewed from the same distance, the PSP's resolution per cm is 7 times that of the regular (82cm rated) TV at 1280x720. At 1080p, that goes down to about 3.1 times.
Now you say that the PSP is typically viewed from much closer than a TV, and of course, that's true. In my particular case, I tend to watch my TV from about 3 meters (300cm), and my PSP from about 30cm. That's 10x the distance. That should make up for the difference, right?
Here is where the percentage of field of view comes in as a useful parameter. At these distances, surprisingly to some I'm sure, the PSP and TV take up very similar amounts of my full human field of view. There's no easier test than holding my PSP at 30cm and see how much this covers up my TV at 270cm behind it (helps to close one eye while doing so). The difference turns out to be negligible! This explains the effect why people who watch an UMD or play a game on PSP can easily forget it is such a small screen - in terms of percentage of field of view, the difference is negligible.
What does this mean for resolution?
At the distances of 30cm and 300cm, the tables turn. Now, suddenly, the PSP is relatively low-resolution, and both 720p and 1080p look comparatively sharper (about 7x at 720p already).
However, for gaming I often sit at 150cm from that TV. At this distance, relative to my field of view, my PSP's screen fits into the TV's screen 6 times. At this distance, 720p looks just slightly worse than my PSP, but 1080p still looks twice as good as my PSP.
Now I've just been talking about a 82cm Widescreen TV. (This equates to about 32") These days, that's certainly not the biggest TV anymore. Especially game developers and show-floors tend to work with larger screens at times, at which the increased resolution may become significantly more visible fast.
I personally think that with the way TVs are made (particularly those with fixed pixels like LCD), and most HD video being natively encoded in 1080p (according to HD DVD and BluRay Spec), 1080p may look a lot better also because upscaling from 720p may not look so hot. The whole 720p/1080i is hard on computer games especially, which is why 1080p is more likely to become a settled-on resolution for a while than either of those two, imho, but we'll see - depending on how it goes, I wouldn't be surprised if a number of games will support 1080p or 720p natively, because in the end that may look much better than anything up- or downscalers can accomplish in theory, let alone in practice. Similar benefits may exist for displaying games in SD - to make 720p look good on an SDTV is harder than making a 1080p game look good on SD.
In short, I think there's little argument that 1080p can bring a significant improvement over 720p visually in many real life cases, looking potentially 2.25x as good. Whether that improvement benefits a particular game depends on where the bottleneck of that game is, but also on how well the hardware deals with 720p/1080p signals upscale/downscale.
So when Laa-Yosh says 'at a price', well, let's just say that in the one extreme, it comes at the price of 2.25x the amount of animation / pixel shading detail / framerate of a game, but in the other extreme, it will give 2.25x better looks and potentially (i.e. depending on how well TVs deal with up/downscaling) even more (a simple example - games like Fl0w or even Virtua Tennis 3 are for normal gameplay not really going to require lots more effects, but will benefit much more from increased detail, because in Virtua Tennis for instance you want to view the whole court, and even if you zoom up to a character, you won't see much more than just that character - and tennis doesn't go on during rain either, so rain or mud effects just aren't going to happen).
Nuance is a good thing.
