Yes, they may have larger internal memory but there is still partitioning issues. My Nexus One only has about 180MB free out of the box for apps. Start filling that with a few apps, data, cache, dalvik-cache, I'm out of room. To install the game I had to get rid of Adobe Flash player. Your game is taking up 15MB on my phone, nearly 10% of my phone's storage.
Nearly 25% of Android phones are running Froyo these days, it's not some small minority these days.
Hacking issues? You mean like pirating and sharing? It's easy enough to do with or without it being on SD, I'm rooted and I can mount my system and data folders (including app-private) as R/W and copy the APK out onto my SD card or open it up and edit any file in it and put it back. I don't because I am a customer who paid for the game and wants to support the development of more games like it.