I don't think we really know what the "bottom" is for dedicated handhelds either. We went from 150 million DS' and 70 million PSPs last gen (220 million hardware units) to maybe 72-73 million 3DS' LTD and 10 million Vita's LTD this gen?
Truth be told too while I don't think ginormous gamepad accessories are ever going to be a big thing for smartphone, it wouldn't take a whole lot for smartphones to be much more game friendly devices.
Apple just filed a patent that allows the home button on an iPhone/iPad to pop up and transform into a joystick. If they ever decide to use that ... it's likely dedicated hardware has a very limited future to a declining one in Japan and a very niche audience outside that.
Even without buttons but with a joystick/pad, genres like platformers, racing games, shooters, etc. would become far more playable.
With gaming becoming a bigger and bigger part of the smart device ecosystem, I think its probably inevitable that at some point we will see a phone with at least a directional input in addition to the touch screen which developers could then make a host of different, deeper types of games with if they wish.
