It wasn’t until earlier today that I realized that arguments like this tend to never consider the problems that exist in the portable computing market today that are (likely) going to get worse in the future.
First off, while hundreds of millions of these devices have been sold these sales are split across a variety of different operating systems (Apple ios, Android, Blackberry, Windows 7), many different hardware architectures, which are also split based on a variety of form-factors (Phone, iPod, Tablet, BlackBerry), and they also have vastly different processing capabilities due to several generations of hardware being released. This means that in order to target this massive potential user base you have to release a system to hundreds of different platforms. This is not going to get significantly better in the future because (unlike a videogame system) the manufacturers turn a profit on hardware, little profit off of software, and want to convince people to replace their current system every year or two.
Secondly, there is the problem that these devices are not purchased based on their gaming functionality and when you take away the people who don’t play a significant amount of games on these devices the smart phone “Gamer” user-base is significantly smaller than the total user-base. When you combine this with the complete lack of sales for games that cost (much) more than $5, there isn’t a whole lot of money to support large games budgets on these platforms; in spite of their very impressive user-base statistics. If these devices can't provide adequate revenue for games like The Legend of Zelda they will not be able to kill off handheld devices.
Finally, this isn’t a problem for phones but a comment on the direction of all gaming devices. Over the next 10 years, with gaming becoming more popular among older people (in part because of gamers aging) and the development of markets in China, India and much of the rest of the world the videogame market may grow to be twice as large as it currently is (or possibly larger). Much like how the current videogame market can support the existence of two handheld devices, three home consoles and the PC (to a certain extent), it is entirely reasonable to assume that the growth in the market will enable portable computational devices (like phones and tablets) to be used heavily as gaming devices while dedicated videogame machines continue to exist and have a healthy market.
