Probably already been said, but Sony's got a big problem on its hands: It's broken the law of positioning.
With PlayStation, they have a brand that owns the #1 position (mindshare, market share) in video game consoles. They've spent 10 years and billions of dollars building up to this level of success, and now they're just walking away from it.
Because PlayStation 3 is not a video game console. More importantly, it's not priced like one.
Sony have vacated their position as market leader in game consoles to try and crack a video game/HD movie player/computer hybrid market that no one's sure exists yet. Leaving a competitor - most likely Microsoft - to simply walk in and sit down in Sony's chair.
Because Sony's removed an affordable next-generation PlayStation game console from the table. The millions of PS owners who've been looking forward to PS3 will certainly take pause when faced with a $500 or $600 price tag. "We just want to play Madden and GTA," they'll say. And that's where Microsoft steps in.
It'll be years - 2008, at least - before PS3 cracks the sub-$300 price point, and by then, I'm sure a lot of gamers will have "jumped in" with Xbox 360. And the more gamers Microsoft attracts, the more developers that will follow.
If Sony moves forward with its plans, I predict a massive swing this generation, complete with a couple of major surprise third-party defections to Microsoft's camp. Once Sony gets up off its chair, and Microsoft swoops in, Sony's going to have a hard time unseating them again.
I think it's pretty basic. If Sony moves ahead with this, its dominance in the video game category is over - and there's no guarantee they'll successfully create a viable new category with PS3.