You're right... about software. This doesn't really apply to hardware at all. Just look at the sales of the PSP after the initial price drop in March or April. They didn't shoot up drastically and fall down just as quickly. Instead you saw a sustained increase of weekly sales compared to the sales before the price drop. Even now with the redesigned system, sales didn't shoot through the roof, but have been consistently higher than previously weekly numbers. If anything PSP sales continue to grow long after the initial release of the redesign.
The 40gb was out for only 2 days, the ad blitz is barely a week old, and the Christmas season hasn't even ramped up yet. Sony still has one more major game release, Uncharted. Wait it out before you call the 40gb a failure.
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 
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.
