Without physical controls a vita successor would do worse off. At the same time the amount of people that would buy a smart phone with joysticks on it are extremely limited. I've shouted from the mountain that a vita phone would repeat the failure of the vita handheld, but for entirely different reasons.
For the current iteration, I believe the best they can do is ride out the gen with the 3rd party support while releasing key 1st party games the next couple of years to appease the markets outside of Japan (because let's face it, they're still getting tons of support). Honestly unless they get a really good idea, its worth abandoning portable gaming entirely and just making an accessory for the Xperia line that allows the phone to plug into a shell that has all the physical buttons you want. Development costs are kept low, you retain the Android platform, and every Sony game you could want would be available via PSNow. Realistically look at the situation - they have a game streaming service and they produce smart phones. That's the best combination you could ask for that will retain mass market appeal.
The two major hurdles I see with this are
A) Battery Life
B) Data consumption
These both can be mildly offset via better compression algorithms, in fact I bet they could squeeze enough battery out of the Z4 to make it worthwhile. Its the data plan that's going to be tricky to figure out.
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