Less than two weeks after Sony released its long-anticipated PlayStation Portable, a handheld gaming device with multimedia capabilities, the device’s most ardent fans began spreading details about their successful hacks. Among the more ingenious: Web browsing additions, instant-message chats, and TiVo-recording playbacks.

The PSP is already a strong seller in that short timeframe. Reviews of the multi-function device are almost universally positive, and with the heavy overlap between hardcore geeks and hardcore gamers, it seems a natural fit for hacker interest to run high. What’s more, the unit comes with 32MB of memory, music and movie playing capabilities and built-in WiFi access, meaning it offers plenty of tools for hackers to play with.

Sony has been mum on the hacks so far. The company didn’t respond to TechnologyReview.com’s request for comment.

However, the company’s history with product hacks suggests that it will tread this situation very carefully. In 2001, Sony forced a fan of the company’s robotic dog toy Aibo to remove code from his site that allowed the dog to do such things as dance.

That fan, known as AiboPet, was served with a lawsuit for his efforts. As a result, Aibo fans boycotted the robotic dog and Sony eventually relented in its efforts when public outcry over the crackdown grew.

The lesson learned: Sony might do well to let the hackers run their course with the device – it would likely engender an even more slavish devotion to the device.

“The hacks show there’s enthusiasm for the platform – that”s good news,” says P.J. McNealy, an analyst with American Technology Research. “If people want to use the device to chat with someone, where’s the revenue loss for Sony?”

With Aibo, Sony’s hand was forced by the public’s reaction, but in the game space, several examples exist of companies succeeding by allowing – and even encouraging –these hacks.

One particularly striking example came with Valve Software’s decision to make the code for its popular game Half-Life available to hackers who then took to the code and created Counter-Strike, which grew to become the most-played online game. Eventually, Valve Software decided to release the game – with full support — in 2002, while still allowing the players to use the older, hacked versions.

The decision turned out to be a good one. After its official release, it went on to become one of the most popular multiplayer games of the year.

Sometimes, consumers come up with entirely new ideas for a product, ideas that loosely adhere to the product’s original intention such as the nascent pod-casting phenomenon.

Podcasting is the act of recording an audio “show” similar to a radio program, and then putting it online for other people to freely download to their iPods. Apple is happy to let these users explore podcasting, provided they’re not playing copyrighted music or allowing others to download their playlists.

If podcasting really catches on, then companies such as Apple likely will sell more iPods as a result, thereby increasing revenues, profits, and user devotion.

But Apple hasn’t always acted so benevolently, as evidenced by the company’s steamroller legal assault on blogs that posted pre-release product information.

These days, companies are faced with the problem of correctly guessing when to embrace their customers and when to clamp down. “Very few companies encourage hacking,” says Schelley Olhava, an analyst with IDC. “But at the same time, how do you stop it without alienating your users?”

Clearly, there are times when a company must crackdown on user modifications of its products. In 2002, for example, Microsoft shut down a Hong Kong-based company that was selling modified chips for the company’s Xbox game system. The chips allowed users to play pirated games on their Xboxes, and Microsoft move was swift and warranted.

But for Sony, the decision on how to react to this PSP hack is a tough one indeed. Any company has a right to defend its intellectual property, but Sony must weigh the balance between coming down hard on this hack and gently steering users away from more malicious modifications.

Making the decision even tougher, Sony as a company is struggling to find its way in the digital era. Most of its digital music efforts have been disastrous, and the PSP is the first technology hit the company has had in some time.

With a new CEO, Sir Howard Stringer, at the helm, maybe now’s the time to strike a new relationship with its most ardent fans, by allowing these innocuous hacks and saving the lawyers for the ones that will hurt the bottom line.