The problem is not the price.
$250 for a 5' inch OLED display and a chipset that's basically double what's in the current iPhone (8 cores right?) is a pretty sweet deal actually.
It's the same price the PSP launched at and successfully launched at.
The problem is times have changed and people no longer need a dedicated handheld gaming device outside of Japan where handhelds are replacements for home consoles.
And in Japan, Nintendo basically neutered Sony by taking away the Monster Hunter franchise.
The only market left for dedicated handhelds in the West are kids (primarily young boys), and Nintendo is simply better at getting that audience than Sony ever will be because they have Mario and Pokemon among others. And even kids are gravitating more towards iPads/iOS devices.
