You're closer with the second but it doesn't mean "dev unfriendliness". The system isn't able to handle high-end PS3 level assets for obvious reasons. With it's screen size, neither does is have to in order to look as good. I can't imagine a dev needing to think very hard to come to:

 "huh... the PSV screen is smaller than my tv... Maybe that character model doesn't need a shirt with textures that good to look nice."

His choices in words were a bit poor but it's pretty clear he's saying that less work needs to go into making PSV assets that will look as good on the Vita screen as it would on a PS3 connected to a HDTV. The "smart" part is about devs not wasting resources making assets bigger and more detailed than they need to be.

Steady decline maybe. Just look at the release schedule and sales trending.

No surprises here, it's selling less than any dev would want. Hopefully they can get it turned around with this year's COD/AC/Persona/PS All Stars etc lineup.

It's cuz Vita isn't innovative enough. It's nothing I haven't seen before.

So there seems to be a lot riding on the success of Assassins Creed.

What would be considered a success for this game, 500k in America? 750k in Europe? 2 million worldwide? The attach rate.......so in general Sony is asking that this be the biggest Vita game yet.......

I didn't write that, it's directly from the article.

Sony should have made the vita even easier to port for ps3 to. As the PS4 comes around, many developers will still continue to produce PS3 quality titles due to the lack of resources, this will be particularly prevelant for Japanese devs, so naturally the Vita is a logical ecosystem for new games which aren't quite as evolved enough to land on the PS4.
But that plan only works if the Vita market is a viable one to begin with, and it would help if the PS3 was instantly phased out upon the PS4's release, (which we know will not happen). So there is only 1 solution- to do what Nintendo did with the 3DS- which was everything they possibly could to jump start it.
We are talking large pricecuts, all of the heavy hitting first party games to be released, new colors, new bundles, new exclusives, 3rd party money hats.. The works!

Because at the end of the day, great hardware isn't enough to attract loads of 3rd party devs.
At this rate, 5 years from now, the question to make a ps3 or vita game will plague the vita, there will be no incentive, especially since porting that game to the vita is still left to the developers to pay for.

the only other possible stop- gap measure would be if Sony would port any ps3 game to vita, free of cost to the developers... But this sort of idea would only satiate existing owners and not attract new.

With ALL of that being said, I have faith things will work out great for the vita and it will eventually be the preferred console of choice for many developers unwilling to initially make the jump to next gen.

Neither is the 3DS really...

Mostly, and that's why I've held out on getting. I'm mostly just getting the XL for the games. 

But, I didn't even know about those 3D screens until the 3DS, so it was new for me.

Okay, I get it now. I shouldn't have said the word idiot regarding that phrase and should've just asked, so now I see your point.

I'm not sure how cheap it would be, still, and I would not assume PSP dev costs. However I can understand that it would be cheaper than PS3 level costs.

At the same time, cheaper is not too good either, since the PS3 costs are already fairly high. It would need to be much cheaper.

But if all this is true, what about AI, what about all the complex processing that apparently the HD twins could do but the Wi couldn't? Why would players want a sub-par version and would they notice it?