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It's one of the things hurting, for sure. It's a tricky situation imo.

I feel like the situation only applies in Japan, because PSP sales certainly don't seem to be hurting the Vita in the west. In Japan, I'd imagine that PSP is pure profit by now. And in Sony's financial situation, I'm sure that's a very good thing. I mean, I don't think they've developed a PSP game since last year, so the effort is all being done by third parties, which is excellent for them.

But it's obviously coming at the expense of the Vita. Unless Sony have some kind of agreement with third parties that they migrate to Vita as long as Sony lets them continue on PSP for the time being, then the longer Sony leave them on PSP, the tougher it gets to recover. 3DS will have just sold more and more consoles, Vita will have sold less and less, and there'd just be no reason to move to Vita over 3DS other than the odd cases of certain franchises which have a bit of an affinity with Sony and probably wouldn't do as well on a Nintendo platform.

I feel like one of the biggest problems with Vita, at least in Japan, is lack of UMD drive. Sure, you can buy most of the games on PSN, but if I were a Japanese gamer I don't think I'd see much reason to upgrade to Vita when my PSP collection would be worthless unless I used UMD passport, and even then I'd have to buy an expensive memory card to store everything. I'm not really sure if there's much of a solution to this problem since it would hike the Vita price up even further if they'd have built a UMD drive into it, and price is already a problem. Perhaps some kind of optional external extra would help (if that's possible)?

But anyway, Q1 in Japan is looking comparatively peachy in Vita terms - 18 games coming in a 2 month window, with a few big name titles (Phantasy Star Online 2; Tales of Hearts R; Soul Sacrifice; One Piece Pirate Warriors 2). Even with such a nice release schedule there's a downside though. A lot of the games are dual-console releases (i.e. One Piece) which will hurt Vita version sales, other games are just upgraded ports (i.e. Tales of Hearts), leaving very few original titles which will shift hardware. I'm hopeful that any PS3/Vita titles might give Vita a boost purely because Japanese love their handhelds, but PSP/Vita titles (such as God Eater 2) probably aren't going to do so well - again, it's a case of "why upgrade when PSP is still getting it?"

I don't know what the solution is really. If I were Sony I would kill the PSP and help fund third parties to move over to Vita, until they've established themselves and then leave them to it. I kinda thought that Sony's focus on the west with Vita in its first year was a conscious effort to convince Japanese devs "hey look, console is selling in the west, that gives you more opportunities to localise than you'd have on PSP!" But that hasn't really happened yet (though, Vita is doing a lot better in NA/Europe than Japan).

So I just don't know really. It's very interesting - but kind of painful - to watch, in any case.