PS2 backwards compatible with PS1, early models of PS3 was compatible with PS2.

This was achieved by simply cramming the older hardware into the newer. Quite a common strategy, really – I believe Sega did this too with Mega Drive being able to play Master System games (using a physical adapter).

Nintendo did the same for achieving backwards compatibility for Game Boy games on Game Boy Advance. Wii-GC compatibility was however achieved by the consoles using the same (but buffed) chipset. Gonna be interesting to see how they achieve backwards compatibility this time around.