So if we haven't hear enough PS3 rumors lately here is another one: a 120 GB PS3 is coming.  Since the 80 GB PS3 has now been discontinued it seems Sony has to replace it with another version.  The 120 GB version would directly compete against the Xbox 360's Elite model with the same amount of physical storage.  This model would also be the fifth variation (20GB, 40GB, 60GB and 80GB ) and would be their high end model.

I think it's a smart move to have the a model with 120GB since it will a good value compared to the Xbox 360 Elite if the 120GB comes out at the $499 price of the 80GB unit.  This model has enough space to make it realistic to download movies, music and TV shows and still have enough space for game installs.  It will be interesting to see if this model is backwards compatible.  Currently the 40 GB PS3 only plays PS1 games and the 80GB model offers partial backwards compatibility.

Sony has not had very much success in the US market and I don't think this model will really help.  At $499 it's still too expensive for the average consumer.  I really think that the core Play Station fans of last generation have made their console purchases.  I lot of those people have migrated to the Wii and the Xbox 360 this generation.  If Sony offers a $299 PS3 at next month's GDC then look to see a lot of the hard core gamers to buy one as a secondary console.  This generation the best games are either Xbox 360 exclusives or are multi-platform releases. So far there has not been a game that requires the hard core to buy a PS3.

Source:
Wired - PS3-rumors-of-120-gb