Chris Walter thinks that Sony is ripping off consumers with the 40GB model, and that perhaps my thoughts on the 20GB aren't so sharp:
I really doubt that Sony could recoup their loss by reducing HD size on their console. Now I'm not going to pretend to be an expert on supply chains, but I would venture a guess that the price difference between any drive between 20GB - 80GB is negligible. In fact it may be more expensive to use a 20GB drive because no manufacturers want to make them anymore (especially with the PS3 selling so poorly).
Likewise the PS2 compatibility chipset is a specialized part and once Sony doesn't need it, no one does. Tons of savings as two specialty components are no longer needed.
I am curious however, how your average consumer doesn't realize how much they are being ripped off on HD space this generation of consoles. Yes, I agree the next-gen systems are under priced, and the premium systems do include additional extras. Still, the biggest extra always seems to be HD space. Of course when then does a 60GB upgrade in drive space cost $100, especially when you can't back it up?

The 40GB seems to be an attempt at attracting non-hardcore (but NOT casual) gamers. Will it work, though?
You've got a point, Chris, although I think that my logic was less in line with the cost of hard drive space and more with the features that the 20GB model offered. It seems that given the choice between Wi-Fi and backwards compatibility, Sony has opted for Wi-Fi. Perhaps time will smile on this move.
Maybe you'll see people picking up old 20GB models and tricking them out with bigger hard drives. For the time being, though, I believe that the 40GB model is geared toward the gamer who buys a few games a year and doesn't care about PS2 games anymore. Maybe it's time that hardcore gamers realize that BC could be unimportant to the gamers who just buy Madden, GTA, movie-licensed games, and Gran Turismo every year.
Special to ardent PlayStation 3 fan AG: make your e-mails shorter and perhaps I'll be able to publish them, rather than leave your messages to get dissected in the Podcast mailbag, where Patrick Joynt eats PS3 fanboys like Grendel attacking Hrothgar. Also, we probably won't see Haze before it releases, so it's not really possible to compare it to Call of Duty 4, which drops in a few (precious) days.