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PSP is fine. It had a lot of problems like load times and battery life that have greatly improved. However the difficulty to use it's multimedia functions legally is a problem that will haunt the PSP for the rest of it's life. It is much easier to download movies and music that are compatible for the PSP than it is to buy a CD or DVD and then rip the disk to a PSP. The PSP makes a great emulator, but it takes a great effort to make it one. People can only justify going to all that trouble if they plan to pirate games. Sony's strict security measures therefore may be increasing piracy. And piracy is ultimately what is ruining the PSP...
IMO this is what Sony should have done-



What if Sony's PSP had literally been a portable PS1? This PSP could have had the same design as now, but have no media features or web surfing (but still had wireless multiplayer). What if Sony took a loss leading strategy and PSP retailed for $100 WHEN IT LAUNCHED? For a launch line-up (and throughout the PSP's life), Sony could have re-released all the popular PS1 games for PSP at $14.99 and called them "PS1 classics for PSP" and then have original games at $29.99. Original game “greatest hits” titles could have retailed for $19.99. What if a FF7 remake and a proper MGS game were launch title games? With a plethora of PS1 ports and remakes along with solid first party support from Sony in the first year (in real life Sony never really ramped up first part until the PSP’s second year) the DS would be dead by now. Considering the DS's and PSP's bad first 6 months, there is no way the DS would have survived.

The PSP would have done amazingly well, and Nintendo would have been forced to use the DS as a stopgap while they develop the next GB (which was rumored to be going to have PS2 level graphics and somehow be cheap) This GBA “ultra” (or whatever it was going to be called) would probably also fall if Sony developed the PSP right. In 2005 it would have been difficult to fit the data of a disk onto a cart, but if the PSP had launched with a cache of RAM similar to that of the SLIM, load times would been bearable. It is true that the battery life would still be worse than the DS due to the energy required to read disks, but would have been improved due to the lower graphical capabilities of the PSP. While battery and loading issues would still occur, (though be much less severe) the pirating issue would be gone. The development of a new GBA would give the PSP at least a year heads start, and I believe a cheaper PSP with a larger variety of games would beat out a new GB.
Then Sony would have all the software sales and would be doing much better with their gaming division.

Sony could have done something similar with the PS3: Have the PS3 have no media features, have graphics in the same caliber as the XBOX 360, and launch at a loss for $299. $299 PS3 vs $400 Xbox360? I don't know how the Wii would be doing, but the 360 would be smoked, considering the momentum and hype the PS3 had in its first 4 months. If the PSP had been a raging success, the hype would have been even greater, and if there were no supply issues, PS3 would have taken off like a rocket.