holy shit, this became a big deal

Yes, Sony should not have caved.

And Seth Rogen and James Franco should have made a better movie.

There's lots of blame to go around.

Not sure what 'blame' there is.  As a business decision, SPE kind of made a judgment call: 

1) the major theater complexes were opting not to show the film due to threats of violence from GoP.  so SPE wouldn't have had a place to distribute.  And they definitely don't have an ad hoc digital distribution/screening plan in response to such a sudden shift in attitude.

2) the hacking/obtaining of SPE's entire email archive, containing all the sensitive content that would undoubtedly been damning for them, not just for internal/proprietary practices and intel, but also whatever slander about people that wouldve been outed. aka Extortion Gold.

so through all the claims of 'caving' and slamming over the precedent of self-censorship, which have a tinge of naivete, Sony did what it had to do, lose-lose.

No, Sony should have contacted President Obama rather than cave to a threat from a nation's government.