As a handheld gamer myself who loves his 3DS I didn't want to believe it, but time and again I've watch people go for the phone games because "it may no be as good, but free-$2 v. $30-40 is no contest".
So, in many respects the mobile market has driven the perceived value of games way down. People see a phone as a necessity and it only cost $50 (with a 2 year contract) and it also plays games that cost nothing or next to nothing. I don't see how Nintendo can compete with that now. I see the difference in quality and care, but more and more people think a flash game is just fine and no longer invest in gaming like they did in 2007.
If Nintendo can go back and find a model that works on more reserved expectations like the GBA days then they have a future. Sony...well, I'm not sure room for two dedicated handheld devices.
