I modded my original Xbox so I could put Xbox Media Centre on it. At that time, there were no cheap media streamers, and building a comparable PC to do the same job would have cost twice as much. Modding turned a games console into a cheap media player.
Now days, the Xbox 360 and PS3 can both stream MP3/Photo/HD Video without needing to be modded. They both have limitations on file formats they support, but that is not a problem if you are ripping movies from your own DVD's into a compatible format (which is easy to do). Besides, you can pick up media players that perform better at much lower costs than these consoles, so its pointless buying a PS3 to hack it for movie playback, as you can get much cheaper media players that do a better job.
So what other uses are left as excuses to mod/hack the PS3/Xbox 360? Yes there were people who bought PS3's to cluster them as cheap supercomputers, but that is a relatively small percentage of customers. These customers can continue to use their existing PS3s for this purpose, they just cant buy any more to add to their clusters, or replace broken PS3's in the clusters. I am sure they can pick up all the second hand ones for spares if they look for them though...
By far the biggest reason to mod is to play pirated games. The issue is this - the PS3 is an expensive console, so many people have not bought one due to the large initial outlay, and along with £45 a pop for new games, it turns out to be very expensive over the life span of the console (assuming you buy your games new). However, if you find out that you can now get the games for free, this will sway the vast majority of people who have held off buying the PS3 until now. Sony will sell loads more consoles (at a loss), and makes no money off the new customers from games. As word spreads about being able to play free games, the problem just compounds. Looking back at the PS1 and PS2 and Xbox, the same happened there. The consoles started off with relatively poor sales due to high cost, then as soon as the console prices started dropping and games were able to be pirated, console sales soared. Initially Sony will make some money off this as most people buy some games when they first buy the console, but eventually everybody has a console and sales slow down. By this time a new console is announced, and the cycle starts again.
To keep this cycle going as is, or to keep them in the console business, the console manufacturers need to do one of two things:
- Combat the hackers to discourage the average user from being able to pirate games, so they keep some profit on the sales of the games
or/
- Increase the costs of the consoles so they make profit off the hardware, and lower the price of the games so it becomes less of an incentive to pirate them
Either way people will complain, so its a very difficult situation to balance. The console companies need to make money, the games developers need to make money, the retailers need to make money. If any one of those stop making money, then, as somebody else said, this will drive them out of the console business.
My take on it is this: If you buy the console, then you should accept the business model that surrounds it. If you don't like it, or can not afford it, don't buy it. You know what you are getting into when you buy a games console, there is no excuse for piracy.