The value proposition of the Vita just isn't there. Nintendo still has their strong hold in the portable business though. Sony can piggyback off that. 

They wouldn't really have to, Uncharted on Vita was pretty good so was God Of War on PSP. These games can be farmed out, it's not a problem, hell Nintendo could even take a crack at one of them perhaps (how about a Retro Uncharted game?). 

Putting your top teams on handheld games is really a relatively new thing even for Nintendo, prior to the DS they did not put their top teams on handheld projects and even today the console versions of games usually get the better/bigger team, ie: NSMBU got the "real" NSMB team, NSMB2 was made by a younger, start-up team. 

The next Nintendo handheld could have some pretty good kick to it too, Vita is fairly powerful but handheld components have come a long way since then. 

I don't think game diversity has hurt any game platform in history. 

Anyways, having games would just be secondary to Sony, if they could parlay this into a component deal with Nintendo, making a deal is worthwhile just on that basis alone. 

Introducing kids and the Nintendo fanbase to Sony IP is also a plus for Sony. 

Ultimately too if they could secure a deal where Nintendo also agrees to support their home consoles (to which Nintendo would have several benefits), that would be the big ticket win for them. 

Downsides? Really minimal, I mean you might have to farm out some projects to studios, but so what ... Sony does that all the time and finances all types of weird indie/arthouse games. 

There's only a downside here for Sony if they were planning on making a Vita 2, which I seriously doubt. 

I'm well aware of that. It's just that when companies combine, they're much more leniant on what games appear on what. It just seems like FFVII would only appear on PS or XB. Eh, I'm going into what if territory. I guess I just shot mysself in the foot due to Sony and SE severing their game deal.

Saw that coming, but my thought process was screwed from the beginning.

Sony as a third party means they have to pay licence/platform holder fees. It means they either keep pushing AAA like quality and make less, if not lose, money. Or they can drop quality either by pumping out games in a short amount of time (unpolished) or by lowering game budgets.

I am inclined to agree in overall sentiment in so far as I've seen people playing FIFA on the last gen PSP and that seems unthinkable on the 3DS for what seems like virtually no good reason outside of a failure of understanding of what handhelds can do. I mean come on, freaking FIFA might be 'bro-dude central' but its also a perfect fit for handheld gaming from a ludological stand-point!  If Sony could help break the line of thinking that prevents other games like that from having enough effort and marketing put in to actually sell to their full potential it'd be epic... 

It would definitely be worth Nintendo's while to hire Sony for a 'games and parts' contract like you suggested if Nintendo even suspects, or if Sony can confidently suggest, that outcome.

Sony makes LCDs, cameras, batteries, and other portable components. Hell they actually own the DRAM factory that makes components for the Wii U. It's a big part of their business actually and will become bigger in the future as they scale back being a consumer electronic brand. 

Securing a contract for Nintendo's next-gen handheld would be a very nice win for Sony. 

Sony already failed with the previous all digital PSP and then the Vita, I'm pretty sure they're done with handheld gaming at this point, they realise they cannot compete with Nintendo on that ground and decided to focus on their home console, they'll probably shift some focus onto mobile devices but it still won't be amazing or anything, probably more suited towards games you play on the train or travel in general but not games you'd play for hours like you would on a handheld.

I'm pretty sure we've already established that Sony and Nintendo would never partner up anyway given the evidence over the years, same with Microsoft, the peroid of making games for other rivals is pretty much over and done with.

I see no benefit to Sony developing on Nintendo handhelds whatsoever. It clearly would take resources away from the PS4/PS5. This was a big reason the Vita software dried up, they shifted all their studios onto the PS4 including ones who previously only made handheld software.

Starting to develop in a big way for handhelds again would once again start to drain those resources. Nintendo's own issues have shown that with the great improvements in mobile technology, it's taken big resources to keep software coming.

Why start to invest again in what is clearly a hugely declining market?