Let's not forget that MGS was not the only game Konami announced for the iPhone/iTouch. Granted, there aren't that many high profile franchices available yet, the only one coming to mind right now is Brothers in Arms, but with these announcements it's very likely that more will follow. Add to that the huge number of indie games (most of which are pure crap, but anyway) available and you already have a very successful gaming platform. And all Apple has done is enable 3rd parties to make and sell their apps. Oh, and yes, produced a great platform and great tools for it.
As for the storage space, you do know that it's same as with your music library? You can store everything in your computer HDD and just sync the ones you want in your iPhone/iTouch. And with the sizes of current games, you can store dozens in your 8GB iPhone in addition to loads of music and pictures. I really don't see storage as an issue, to be honest.
The thing that non-users don't really understand is how the AppStore is the game changer (pun intended). Apple are probably the most succesfull company doing digital distribution, and now they extended it to applications. And the key ingredient for success? No physical distribution of apps at all, so they are not competing against their own retailers. Nintendo and Sony can't just follow suit, or they will anger their retailers. In addition, I hazard a guess that Apple HW has fair margins for retailers as well, so even without software sales they have a reason to sell. After all, the HW has been selling great even without the apps. IMO, Apple has a better business model than Nintendo and Sony when it comes to HW and SW retail for the handhelds. That may lead to iPhone/iTouch getting major franchices via digital distribution, but it's unlikely to happen for DS(i) or PSP.