[Archonsod]

This kind of copy protection is present in most games to some degree these days, usually on top of the usual disk protection or similar.

Turin said:
1.Bad word of mouth.
People don´t know that it´s copyprotection, so people assume it´s a bug. That certainly will drive people off, who are thinking about buying the game, but hearing from their pirate friends that it´s a really buggy game.

Generally, if people had 'pirate friends' I doubt they'd bother buying the game. Why spend money when your friend can give you a copy? It's the same as the "pirates might buy a game" argument - the small number of people who would fit into this description would hardly register on the sales front.
Generally, most purchasers would use reviews on websites or magazines for their 'word of mouth'. You tend to find a lot of people would put such bugs down to the difference between systems (especially if the problem somehow implies the friend's system is inferior. E-penis envy should never be underestimated!)

2. Alienating semilegitimate users:
Unless it has changed recently, it can take quite a while for the copy to arrive when ordering from some publishers. Since many people aren´t very patient, it´s pretty likely that they will use a pirated copy until the real one arrives. Now guess what happens when they find out that the 55Euro game they just ordered has strange bugs/crashes.

They've already ordered it. Presumably they'd figure it out when the legit copy arrives. If not, in the words of Johnny Rotten "We have your money". If they pre-ordered it then they may cancel, but after that the sale is made (I doubt you'd be required to refund the consumer if you could state the problem was an illegitimate key being used). The odds on them having the game prior to it's release (the point when the order is despatched or otherwise 'too late to cancel') is fairly slim.

3. Wasting programming time:

99% of requested features are always ignored anyway. It's not normally a factor to programming time, since the developer usually knows precisely what they want to add to the game from it's initial development stage, usually.
To implement this kind of protection is rarely time intensive at all (presumably it just checks the key against a blacklist). Even with more advanced types (such as those which actively scan the memory and system environment) it's not necessarily a waste of time - not only are you protecting your investment, but the methods used for the protection are often part of something else (in other words, the protection is more of a secondary feature to another bit of coding).

4. Not trusting customers:

Not really an issue. It's like saying manufacturer's should stop using car alarms because it will alienate car thieves : a legitimate user should never encounter the security feature, while illegitimate users (i.e. those who haven't paid for your product) are prevented from using it. You have a small percentage of false positives, but this is comparable to the small percentage of problems any feature would cause to people with particular system configurations.

1. The developers can get the feeling of satisfaction that no pirate is enjoying their hard work.

Not really, unless Illwinter issue a patch everytime someone produces a keygen or key then it's never going to be up to date. What you can do is make it just that little bit harder for the game to be pirated, which generally reduces the amount of people who use a pirated copy.

For example why don´t you put at least an errormessage like Nagot gik fel:badcdkey after the error, so that the pirates know it´s not a bug and you don´t get the bad word of mouth effect?

The main problem with this is you're telling the real pirates (those who produce the keygens/cracks) precisely what the problem is, making their job easier. I guess the idea is that these guys get fed up with the buggy game, and decide not to bother.
There's also a secondary purpose, though I only know of one company which has ever used it. If someone reports the problem, then you can usually identify them (for example, their IP address from a forum post) and take legal action.