It's extremely short sighted to think that the current market for portable games is going to exist primarily off the current (actually, last generation) business model that was built on the same dedicated hardware and $20-40 retail game structure.
It's really the $40 retail games that I see the average consumer having the greatest issue with as the vast majority of portable gamers don't play for hours at a time or even hours every day. Typically, sessions are probably well under 30 minutes and in most instances a typical game being purchased isn't going to be seeing hours and hours of cumulative play.
So the question is for those who aren't dedicated portable gamers, are they really going to see the value in a $40 retail game?
I'm not even a typical consumer as I buy pretty much every platform that comes out, but I'm not a heavy portable gamer and frankly, I have a hard time justifying paying even $30 for a new game on a portable that I know I'm not going to be hunched over playing for hours, especially when there are a ton of entertaining XBLA, PSN, Wii Ware type games for a fraction of the cost on the iPhone, that by no coincidence, I'm always have on my person.
As for the whole graphical debate; there really isn't any. There are already games on the iPhone 4 that look better than any portable game ever released, bar none. And while I believe the NGP will really raise the bar in that area, unlike dedicated portables, phones get major hardware updates on a 1-2 year cycle as opposed to a 5 year plus cycle.
For the record, I'm having fun with the 3DS. But I'm not buying any $40 games for it. And I won't be buying any $40 games for it until someone releases a game that I'm pretty sure I'll play for more than a few hours. As it stands, there are already a few games on iOS that I know for a fact I've spent more time playing than the typical PSP/DS games I've bought over the years.
And this isn't because I have some sort of strange obsession with smartphone gaming; that's just the way it is. I can literally count the number of new release PSP and DS games I've bought over the past year on one hand.