It's running the PowerVR SGX 3D accelerator, which has support for OpenGL ES 2.0. OpenGL ES 2.0 gets away from fixed function pipelines to programmable ones (similar to going from DirectX 7 > DirectX 8 if you're familiar with the API in the PC world).

I guess I should've worded it a little differently. Games written for OpenGL ES 1.1 will work just fine on all three iPhone models (as well as the iPod touches) so from that perspective, the 3GS doesn't break compatibility. However, if a game developer wishes to take advantage of the programmable pipelines for fancier graphics, then they'll have to eschew backwards compatibility or choose to create two rendering paths (one for OpenGL ES 1.1 and the other for OpenGL ES 2.0) to support all iPhone models. The latter option, obviously, takes more development time.

So technically, if you were to develop *just* for the 3GS, it's very much a console-like environment since the hardware is locked down. The thing is that if phone hardware evolves the way it does on the PC (i.e. new phone models with ever more powerful hardware keeps getting released every six months or a year), then the development path is akin to that of a PC games in the 90s and earlier this decade. You have to make a game that supports many different hardware combinations, from low-end 50 dollar phones to the latest cutting edge 400 dollar plus phones, in order to have as large of a market to capture as possible. This is in contrast to the console environment, where you have a single target platform to work with and you learn to squeeze ever more power out of the console as you develop titles over its lifetime.

Developing for the first two iPhones and iPod touches was akin to developing for a console. The hardware was identical, save for flash memory and phone capability differences between them. With the advent of the 3GS, the dev environment looks more like a PC where you have to figure out if you want to develop for the high-end only and get a smaller market or develop for the baseline albeit at the cost of fancier graphics or longer dev time.