I think they could sell games but they should have more simple, fun games that don't feel like PS2 games. For example if you buy FIFA for PS2 (or PS3) are you really going to buy it for PSP?
Another option (actually I've just thought of this and I think this would be great) would be to have PS3 games ship with a PSP version (rather like they're planning with BR). So I get R&C for PS3 and included is a mini-adventure I can download to my PSP. Same with games like FIFA - the PSP version ships with the PS3 version.
Then get fun games out there that suit the audience. Also the BR movie link and better music videos, etc. would be great too.
I def think PSP is not seen or used by many as a gaming handheld. If they ditched UMD, got rid of drive and put touch screen on instead it would be a great mobile entertainment device - particularly with the TV out and Internet Radio.
Try to be reasonable... its easier than you think...
