To no ones surprise Sony had announced the $399 40GB PS3 will be coming to North America on November 2nd and effective immediately the 80GB PS3 will drop from $599 to $499.  The 40GB PS3 will have less UBS ports and no memory card readers.  The biggest surprise about the 40GB PS3 is that it will have no PS2 backwards compatibility but can play PS1 games.

The 40GB PS3 is a great device for watching BluRay movies on and playing the occasional PS3 game.  By removing backwards compatibility they are putting out a product that will kill PS2 game sales and most likely fool a lot of consumers this holiday season.  There are PS3s out there but the users are not buying PS3 games.  By having limited backwards compatibility on the 360, it forced consumers to buy 360 titles instead of original Xbox games.  This move killed the original Xbox but propelled the 360 and now Sony is trying to kill the PS2 in an effort to propel the PS3. Sony's Jack Tretton confirms this by saying removing backwards compatibility "encourage buyers of the entry-level PlayStation 3 to purchase more games designed specifically for the new system." to the Wall Street Journal.

After the September NPDs came out it's not surprising that Sony has gone down this route.  They are hoping that by lowering the price again they can sell some more units and in turn sell more games.  It has been reported that Sony has reached out to 3rd party developers asking them to not abandon the PS3.  If Sony can't get their sales above 200K/Month expect a horrible holiday season for Sony and possibly the end of the PS3.

Source:
http://blogs.mercurynews.com/aei/2007/10/news_sony_playstation_3_announcements.html
http://blogs.mercurynews.com/aei/2007/10/deans_take_on_npd_numbers_for_september.html
http://kotaku.com/gaming/spin/jack-tretton-says-dropping-bc-wasnt-for-cost-measures-312628.php