On screen buttons may seem to take up space, but only when screen space is not an issue. When you are watching a movie or playing a game, they go away. Having on screen buttons does not mean that the screen is smaller. Manufacturers make the screens larger for the thought process of "it takes away screen space." If you think about it, having on screen buttons actually makes the screen larger because of this reason. My Nexus has a 4.65" screen with on screen buttons so when it is at the home screen, I have a 4.3" screen, but when I watch a movie, I have a 4.65" screen. A manufacturer can also make the phone smaller and simpler with on screen buttons for example the Razr M.
With on screen buttons you can change how many there are, which ones there are, hide them so they only show when you want them to, or to not have them at all and use something else, such as pie controls. With captive buttons you are limited to what the manufacturer puts on the phone.
I had captive buttons on my Bionic and I have on screen buttons on my GNex and will never go back to captive buttons again after using on screen buttons. I also think that it makes the phone look cleaner. I guess to each his own.