Now to be clear, a software drought is never a good thing for any system. However, in the case of the PSP, I think there is a positive that will come out of this situation. A proverbial "diamond in the rough."
IMO, one of the problems the PSP has always faced is the perception that the library is a sea of over-priced garbage. This really shouldn't be a surprise considering all the sub-par ports and just downright awful games that were thrown on the formats. In the early days especially, publishers would release gimped games like Prince of Persia onto the system and charge consumers $50 for it. This left a horrible taste in people's mouth and probably spurred on the piracy movement.
This publisher approach toward the PSP causes two problems: A) the sea of crap makes consumers wary of buying games b/c they have been burned in the past and B) the huge volume bad games overshadow the few good ones. This also means consumer dollars are spread across a greater range of games. This is the same sort of beef many devs have raised with Xbox Live Arcade.
All consoles have had to deal with this same sort of issue, but rather than invalidating my argument, I think it goes to show that the PSP has more issues beyond this one (such as the huge piracy rate and the fact that people don't necessarily buy a PSP for games).
All of these reasons contribute to why the PSP software market is so fickle. IMO the drought we're seeing now is a market correction that's weeding out the crap. What we'll see now is overall software sales continue to spiral down, but we'll see quality games sell better than we would've thought. In other words the lack of games will concentrate gamers' attention to the few very good titles that are coming out, which will result in good sales. In turn we'll see some developers come back to the system, but they'll come armed with a new approach that's more suitable for the system.
My Top 5:
Shadow of the Colossus, Metal Gear Solid 3, Shenmue, Skies of Arcadia, Chrono Trigger
My 2 nex-gen systems: PS3
and Wii 
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Prediction Aug '08: We see the PSP2 released fall '09. Graphically, it's basically the same as the current system. UMD drive ditched and replaced by 4-8gb on board flash memory. Other upgrades: 2nd analog nub, touchscreen, blutooth, motion sensor. Design: Flip-style or slider. Size: Think Iphone. Cost: $199. Will be profitable on day 1.







