The way it should be sold is as a PlayStation Phone, the ultimate gamers phone. The current Vita is the perfect form factor. The driving force behind it would be the ability to play full featured handheld and console games on the go, without the need for additional accessories. With access to PS Now and Remote Play over 4G, a user could jump in and play home consoles games any time anywhere to go along with the massive cataloge of local PS Vita titles, and Legacy PSP and PSOne titles.

Hell yeah, it would absolutly be in direct competition with the Nintendo product. Whether people want to admit it or not, PS Vita and 3DS are in competition with mobile phones and tablets. These are all mobile devices that can play games, browse the web, view social apps, hook the user up to a digital entertaiment ecosystem and more.

The way it should be sold is as a PlayStation Phone, the ultimate gamers phone. The current Vita is the perfect form factor. The driving force behind it would be the ability to play full featured handheld and console games on the go, without the need for additional accessories. With access to PS Now and Remote Play over 4G, a user could jump in and play home consoles games any time anywhere to go along with the massive cataloge of local PS Vita titles, and Legacy PSP and PSOne titles.

1) They tried that already and failed.... miserably

When? Do you mean the Xperia Play? If so that was never a Playstation Product, and did not see one Playstation game ever hit the device. It had no access to PSN or any of its additional services.

2) Those components would cost a lot

No more than a regular hi-end smartphone. It could easily be on contract with AT&T, Verizon, Sprit, or T-Mobile for $200 down, and a two year contract. Even then they would be racking in major profits on every one of them. The actual bill of material on something like a galaxy note or iphone is only around $250. A PS Phone would be right on that range.

3) Sony's Xperia phones aren't making any profit and aren't popular by any means (look at the iPhone, Galaxies)

The phones are making profit, the issue is, they over valued the brand when they bought out the joint venture. That is why they had to do the $2B one time right down. As for the popularity of the Xperia phones. They are doing great in Japan and EU, the problem is that they have only ben on T-Mobile since the buy out. They finally made it to Verizon with the Z3. If they can secure deals with Sprint and AT&T with the Z4, and put out a big marketing campaign, they can do great. Z3 and Z3 Compact are consider by many the best phones of 2014. If they can repeat with the Z4, then they will have pleanty to boast about.

4) They brought remote olay to the Xperia line up (Z3/Z3 Compact). It's still quite cumbersome because you still need a DS4 Controller

And that is why a PlayStation Phone in the Vita's Form Factor would be great. I have a Z3, and have given the remote play many chances. Like you said, it works great, but only if you have a DS4 with you. Due to those complications, I leave to Z3 at home, and use the 3G Vita with Skype for gaming and communicating on the go.

5) Phones are crazy expensive, especially where carriers don't subsidize them

Again. Phones are rediculously over priced. Sony has many options with this kind of device. They can make huge money selling it like the current model for smartphones. In that case it would be a non issue. Or they could sell it at near break even levels like a dedicated console, and profit through PSN.

6) Who's going to advertise the thing?

If they partener with AT&T, Verizon, T-Mobile, and Sprint in the US, then they will have plenty of people advertising it. With partenrships like that, you get Walmart, Best Buy, Car Toys, and any other company out their trying to sell phones marketing the device.

7) Bettery life will suck, and it'll be crazy thick. People don't like thick phones.

Why would the battery life suck? Sony has amazing battery tech. With my Z3 I can stream youetube music videos 10 hours a day, and stream to a Bluetooth headset and still have 15% left when I head home. If I just stream Music Unlimited, with the power saver feature on I end up with 70%, and that is still checking facebook, browsing the web, or watching Netflix, Crackle, or Video Unlimited on breaks.

On the thick phones part, I am not sure what the majority want. For ages people wanted the smallest phones possible. Now that they are very usefull, people want the biggest screen possible. I personally, think people would like thicker phones if they knew how much more battery life they could get with them. I also think that the added functionallity of the PS Phone would outweigh the draw backs in the eyes of someone looking for a gaming phone.

8) Just to throw another wrench into this idea, Sony is looking to sell their smartphone business, just like they did with their laptops (Vaio). Sony just doesn't have the money to take these crazy risks anymore and will try to sell anything that isn't making money.

True, there has been some rumor about Sony selling their phone buisness. How would that effect PlayStation though? Wouldn't that only make a stronger case for a PlayStation Phone. Then it would not be in direct competition with another branch of the company. I think the best thing they could do is roll Sony Mobile Communications into Sony Computer Entertainment. This whay they could use the experience of the Xperia team, the partenerships, and all of the patents to their advantage. Plus they could continue to make smartphone form factor device to attract the less gamey audience to their OS and Network Services.

Honestly, by making the Vita a phone, I don`t think it would be directly competing with the 3DS anymore. A core difference between a smartphone and a handheld is their core focus.  A smartphone ranges from a wide sort of things it can do, but a game handheld has the advantage of games being the core focus, which would make for the best optimization of games. It distinguishes itself from smartphone games, by having games be its core focus. Smartphones you can play somes, but most of them are not like games you can play on handhelds. A game focused portable system has the appeal for people who just want to play those bigger sized games.

A smartphone has that advantage, but since it focuses on a wider range of things, trying to have games match that quality while having the other functions would be more difficult, or cost more. It may also be that smartphone owners don`t care for large games, or people who play games would prefer just a core game handheld.

I don`t think your idea of a gaming device/phone would work as you proposed, at least for now.

I don't get how it would not work, or how it would not compete with the 3DS line. It would be the same PS Vita form factor as it is right now. On the same OS, with the same set spec CPU/GPU and RAM allotment. The focus would still be on games, the only difference would be the fact it has a native dialer app. The 3G Vita with Skype already does phones call over the 3G network, it can even do it in game. And every Vita on the market is already capable of the wider sort of things. There are calculators, calenders, maps, translators, books, comics, fitness apps, diet apps, note pads, photo viewers, stop watches, currency converters, weather and news apps, and much more on PlayStation Mobile. 

This would give developers the controls, set specs,  and focus on games like a dedicated handheld, while also giving them a market on one device that is as large as the whole home console market, or even bigger. The yearly updates would only effect non gaming functinallity. Better Wifi, Bluetooth, Mobile Networking, more RAM for better multitasking, and better battery for long use. Plus whatever new tech hits the market can be incorperated.

Why is the idea of a dedicated gaming device that can also do other things so hard to grasp? 

IIRC the Vita did have a 3G version that could kind of act like a phone. They discontinued it I think.

Yes, the 3G Vita can make calls via 3G and Wifi using Skype (even in game). The problem is it was never makerted that way and it was only available on AT&T. At the time AT&T had major network issues and a bad image due to iPhone overloading their network. Due to that the 3G on Vita was severly gimped to help relieve traffic, so most features did not work or were very limited. I just started using my 3G Vita as a phone last month after getting a Z3 and moving to AT&T in November. That is when I releaslized how much better the Vita is than the last couple of Galaxy and Xperia phones I had.

Another problem with phones (and one I forgot to mention last time) is that phones evolve at a rapid pace. People don't keep phones for more than 2 years, which is peanuts in a normal consoles life span. OEMs are expected to release a new model every year, or they risk falling behind the competition. The constant change in hardware will make it hard for big game devs (AA-AAA) to make games for the thing.

I explained this in another post, but I will do it again here. They can continually improve the PS Phone while continue to build games to a set spec. They can add more RAM, better screens, more battery life, new Wifi, Bluetooth, and Mobile standards. New tech can be added at yearly intervaults, just like any other phone. There is no reason the games can not be developed to the same standard spec/hardware for 5 to 7 years just like every other console and handheld before. 

Then when they hit the point of a true generational leap in tech they can set PS Phone spec 2.0. From there they can go another 5 - 7 years, just upgarding the supplementry aspects to keep it competitive against other devices, and with the newest standards.

Edit: Also, since it'll be Android, Piracy will be a huge issue

And, No. If they do it, it has to be on their own OS. The PS Vita OS is already perfect for it, and PSN already offer places for everything from garage devs to world class companies and game publishers to deliver their content. They can easily start by drawing in the gamer crowd, and letting all of the apps on android and iOS build up around them just like Google and Apple did. Piracy will always be an issue, but it ain't gona have a thing to do with Android.