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I think part of the problem is that parents lend their smartphone for just a few hours/minutes to keep their kids busy. No need for a 3ds with a 3d horses, just download angry birds. Nintendo tapped in a blue ocean, but it's becoming red now. There is nothing they can do to stop this.

There will always be a market created by the core gamer. Sony will be in a better position, since the casuals are shifting away from handhelds. I don't believe Vita will significantly outdo PSP. Sony will leverage PS3 development, while Nintendo will leverage cheaper development. Just a wild guess handheld market will drop 30% compared to PSP/DS era. 3DS and Vita will go head to head and split the market equally in half.

4.3" screens are good enough. It's just a matter of when a popular (ergonomic) bluetooth controller releases for mobile phones (extra battery built-in?). Ice Cream Sandwich will have this kinda support. It's also a no brainer games will get better and better on mobile phones. Ultimately third partys don't really care about true handhelds. Apple, Google and even Microsoft are in a better position long term.

So no Sony get fight this trend.