I have my own company doing iPhone software, so you may want to take anything I say about it with a grain of salt. I do not think for a moment that iPhone would be bad for the gaming market. In fact, as has been noted, it is expanding the market, not really taking away from the existing DS or PSP market. It might have an impact on the cell phone gaming market, but even that remains to be seen.
About the quality and depth of games on the device: sure, it is mostly über-casual games done in a few weeks, with very low production values and little content. There are some exceptions, and it is likely that more will follow. I once again remind everybody that the SDK for iPhone has been available for about a year, and very few major devs and/or publishers were onboard from day 1. That being said, I belive that the iPhone (and perhaps cell phone market as a whole) is quite different from dedicated gaming devices. Also, the market is less inclined to pay "full" price for the games, so the economical aspects of the platform seem to strongly favor smaller games with lower production values. It remains to be seen how the new in-app purchases coming this summer will affect things, but hopefully they will enable bigger and better games with more content to be made.
Hardwarewise the Iphone platform is challenging, and the best practices for game UI design have not yet emerged. It is quite clear that some types of games will be nearly impossible to make properly (for example imagine Virtua Fighter or any other fighting game with complex button combinations), but for some other genres the touch screen and accelerometer can be actually better than for example PSP controls. Regarding the available memory I belive the PSP and iPhone are about on par: the iPhone OS is quite a memory hog, but then again it is a multipurpose OS.
I very strongly believe that as a device, the iPhone (and iPod Touch) has the potential to deliver just as engaging and deep games as PSP and DS, but it might be that the market is not yet mature enough to support such games.
