It's the "experience", not the handheld, that is the problem. When someone can play a game like Infinity Blade on an iPhone with a Retina screen, for a few bucks? Why the hell would they see the need to fork over $200.00 and $40.00 a game? The experience is somewhere else, and much, much cheaper. With 3DS, there are two screens, 3D, and software/gameplay that is unlike anything you can get on your smart phone. That's why it still sells.
Nintendo understood this back when the DS launched. Sony thought that people wanted a portable PS2. They were wrong.