The problem is that the DS offers a unique experience in that no other console or handheld has the dual screens and touch screen. The PSP offers a PS2 experience on the go, and some people just don't find that to be enough of a selling point. I personally love both and think each one is better than any console out there.
As far as the PSP2, they need to copy Apple. Sony needs to set up a shop like Itunes which will let you purchase movies, music and games all digitally. The new PSP would need a respectable sized hard drive, at least 80 GB, and yes, hate to say it but multiple SKUs. Everything can be collected in your store and synced to your PSP just like an iPod does. Games can also be available at retail for those that wish to have a disc or whatever proprietary format they choose, preferably carts this time, as long as they can hold the necessary data. Another good idea would be to have a monthly subscription service similar to Steam for games, Napster for music and Netflix for movies. I'm not sure if it would work completely, but it's an interesting idea to bounce around.