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its very easy to improve a companys tactics after its already proven a be less than brilliant (avoiding the word failure here)

what if Nintendo used CDs in the N64?

What if Nintnedo never pissed Sony off in the snes days?

What if MS designed the 360 properly in the first place?

Although they could all be interesting topics, discussion in them is ultimatly pointless.

If sony had marketting the PSP differently and it was suddenly a blazing success your analysis goes on as if Nintendo carried on regardless, they wouldnt just ignore their problem, they would have stepped up their selling strategy accordingly.

I dont think anything sony could have done would have been a match for the casual/non gamer attack that Nintendo masterminded with the DS and Wii, I dont think theres that many gamers that want to relive old games over and over, on handheld or other wise. Targetting an untapped market was more benificial than anyone expected and your PS1 strategy would be as useless as Sonys actual PSP strategy was against it.
Nintendo's ability to make games that appeal to all ages, plus the fact that they are untouchable in handhelds plus their decades of experience was just something sony couldnt just come along and defeat like they did with the PS1 vs N64.

A more interesting discussion would be what could sony do now to save the PSP, or do they infact even need to save it, is it OK to have a smaller, but respectable % of the market?