Sony is changing the hardware specifications for the Playstation 3 in Europe and other PAL territories, according to a report by Reuters. The report, confirmed by Sony, indicates that backward compatibility for PS2 and PS1 games will now be provided by a combination of hardware and software, rather than the hardware solution in the Japanese and American Playstation 3 consoles. This move may be a cost-cutting measure for Sony; software emulation would allow the company to remove the costly Playstation 2 hardware in the console used in other territories. Sony claims that PS1 compatibility will be high, but that PS2 compatibility will be limited as Sony focuses on “developing new games and entertainment features exclusively for PS3.” One would expect high compatibility for PS1 games; Sony’s emulator for the PSP already seems to work with a large number of games tested by PSP hackers. Without full compatibility for PS2 games, though, Sony may find itself competing against its previous generation console more than expected. Given that the European territories already face the highest adjusted price for the console, this announcement can’t be good news for Sony fans abroad.