Running Time - adding in the explanations of the psychic squid and Vaught's teleportation machine would have made the movie run much longer. It was already at the maximum running length most people would sit through.
Characters - The island and its inhabitants were able to be entirely cut from the movie by eliminating the psychic squid. Adding them in would have increased the number of characters significantly and added more subplots.
Visual effects - Text is easy to use in comics to explain what's happening. But you can't show a psychic shock on the screen, you can't display the years of nightmares people were described as having afterwards. Explosions, though, are pretty and very visible.
Tales of the Black Freighter - This subplot, which confused several readers of the comic, was connected only to people on the island (and one child who played only a small part in the movie/comics), and could thus be eliminated by eliminating the psychic squid.