Sony's main issue is that they need to show consumers reasons to play PSP games on a handheld as opposed to a console. PSP has some good games, but most of them just don't mesh well with the handheld experience. They are often epic cinematic and complex games. I think a lot of people who play handhelds just want quick pick up and play games.
They need to have their handheld games be unique and differenciate themselves from console games like Nintendo does with DS. DS games cannot be played on home consoles, and if they could, they wouldn't be the same experience. PSP games are just PS3 games with worse graphics. This is also why you usually see either the PS3 or PSP doing well, but not both. The PSP was thriving when the PS3 was struggling. Now that the PS3 is doing better, PSP sales are waning. They're just too similar.
