I see so many people who simply never gamed using their phone now for basic games that remind me of early 80s arcade scene. I am curious about children gaming habits as they might shape the next decade or two.

Honestly the main issue with smartphone games is the lack of a directional input. Touchscreen buttons are functional, but even a small discreet trackball for cell phone/smart phone gaming would improve things tremendously because it would allow you to "control" your on-screen character a lot better.

I 100% second that. 

In terms of gaming, the tablets and smartphone and touch input are not adequate in terms of gameplay imho.

That's true, but what I think is going to happen is this gen you're going to see people cut back on their "game only" hardware purchases big time. 

Tablets/smartphones are big time entertainment devices letting you watching Netflix, text, Instagram, Twitter, connect to all your friends, surf the internet anywhere, email, etc. 

A game console can't compete with that, a phone is much more exciting and it's also a status/fashion symbol. 99 cent games are just the icing on the cake, there's so much more a smartphone can do. 

People will still want their Madden/Call of Duty/etc. though, so for that they'll buy a Playstation or XBox IMO or in Japan a 3DS for Monster Hunter/Pokemon. 

But I think what you'll see is people buying a PS3/Wii/DS/PSP/XBox all in one generation -- that's going to go away. To get their gaming fix, people will see they just need one device for "core games", the tablet/smartphone is going to cannibalize their free time otherwise. 

everything gets smaller so will tablets until they transform into smartphones

Sorry, I should clarify. I think Smartphones and Tablets are here to stay, I mean as a primary gaming platform they are a "fad". I think games will always be on them, I think they will be used, but as Japan shows they seem to be, in my opinion, a gateway to dedicated gaming moreso than a block.

No, they're here to stay. Smartphones are ridiculously useful and are in everyday use whilst tablets will eventually merge/replace laptops. Both share similar app infrastructures and most of the games on the platforms are simple time-sinks that are ideal for short bursts of play for the daily commuter. For the majority of consumers, this is actually enough and they will never crave the sorts of experiences that consoles can offer.

I honestly have no idea how reputable this analysis is (IDC's a big name, only heard of App Annie a couple months ago), but there is evidence that smartphones and tablets are already more important to gaming than the 3DS and Vita are:

http://www.theverge.com/2013/2/21/4012812/mobile-games-beat-handheld-games-in-consumer-spending-last-quarter

I actually think an XBox tablet is coming from Microsoft anyway, it's been heavily rumored and makes sense since they're making Surface tablets on their own.

Then all the people crying for physical controls maybe can stop for a while.

Wouldn't surprise me. What third parties really make a lot of money off the 3DS or Vita? How many Western developers do? It's completely irrelevant to devs outside of Japan. 

And really the 3DS is just replacing the traditional home console in Japan, which has gone kaput there.