It was indeed used to make room for more radio/ equipment. This website says they removed the large gun and hull MG as well. I just wonder why they didn't keep the coax in the same place and put the fake barrel on the center. Must have something to do with how the stuff was arranged inside.
Pz.Beob.Wg.III were up-armored, including a specific 5 cm gun mantlet (vs. 3,5 cm on the original).
Besides Fu 8 and 4, it also carried a "Funksprechgerät f" which could transmit over distance of 4-5 km to loudspeakers mounted on Wespe or Hummel, allowing crews to hear the orders of the artilllery observation officer and his corrections of fire.
There were still 58 Pz.Beob.Wg.III in service with frontline units on January 1945, then reduced to 31 by 15 March 1945.