Yea, I am sure a percentage of the people downloading games will buy them if they are forced to. Low hardware but very strong software is a better than high hardware but low software.

Oh not this again... That's not how software pirating works. When a person opts to pirate software instead of buy it, it's because they feel the price of the software is too high. If the option to pirate is removed, then they won't suddenly decide that the prices are fair; they'll just opt not to buy anything.

You're partially correct.

There are people who will always buy games because it's ethical.  There are people who will always pirate games because they're complete thieves.

It's the people in between that vary.  Some will only pirate if it's really easy.  Others will only pirate if games are really expensive/money is tight.  Some will only pirate if the risk of getting caught is low.  Some will only pirate if it's the only way they can get ABC game.  The list goes on but the point is that price isn't the only incentive to pirate.

Thus, even if the prices are lowered the piracy rate may not be lowered much at all.

I'll admit, I was providing a single example. And you do have a solid grasp of it. But there are fewer true pirates than there are circumstantial pirates. Circumstantial pirates are the result of supply and demand not being in equilibrium. As you pointed out, this lack of equilibrium does have many causes besides price, and lowered price on software won't necessarily drop piracy entirely.

The most important component was ignored, however: how the product is perceived by the end user. The PSP is not looked at as a gaming-centric device, for the most part. The mainstream see it as yet another all-in-one device, with an overblown price tag to match. And part of the justification in buying such a product for somebody who doesn't really want to pay that much is that they can just get the media to play on it for free. Remove that option, and hardware sales will drop down to match the true demand for the product as a gaming system or all-in-one system.

Ironically, my personal experience (FWIW) is the opposite.  Most people see the NDS and PSP as gaming devices.  In fact, a lot of people I know who aren't "gamers" that probably don't know anything the PSP really does outside of playing games.

However, the NDS has Mario, Pokemon, and an assortment of other titles that they recognize.  The PSP has...?  I know that it has Crisis Core and the rest, but they draw a blank.  There's no easily recognizable icon that they recognize.  To them it's like going into a store and picking between Jiff peanut butter and the off-brand and the off-brand is more expensive.

That rather doesn't change the point that the PSP is not perceived as being the choice portable gaming system, though. Playing second banana has this funny habit of making your overall software sales low. Ever checked the overall software sales of the systems that didn't make it? You get occasional peaks like Halo and Halo 2, or Super Mario Sunshine and Mario Kart: Double Dash, but most of the software just plain tanks compared to the software on the system in the lead. Sounds just like the PSP, doesn't it? Having a lack of piracy wouldn't fix that problem.

I personally wonder whether Sony's focus on "10 year products" in part because if their system doesn't last "10 years" they could be in serious financial trouble ...

The PS3 and PSP are both products that had massive R&D budgets, and Sony lost billions up front due to selling the hardware at a loss. Since the PS2 was (and still is) massively popular Sony was still selling a lot of PS2 software and hardware for massive profits which minimized the impact of these losses on their financial statements.

Now, the only company who has been able to remain profitable (and thus survive) from a trailing position in the console market has been Nintendo mainly because of their massive first party software sales and super profitable gameboy line. Most companies find themself in trouble because the massive expense associated with R&D and launching a system (hardware losses and marketing costs) are never recovered in the lifetime of a console, and the longer they survive the deeper of a hole they dig for themself.

Most of us know that you can not will a console into having a long life, and that third party publishers truely determine how long a console last (by supporting it after the 'next-generation' console has been released), and they only care about the residual users on the system; and the number of residual users is largely dependant on how well the console sold.

 Here I have to agree ... many see spending 40$ for a portable game way to much , when a Wii game , a newly released is 50$ . Many EU games on the PSP only start selling again when they hit platinum edition , and many games skyrocket at that point ( as much as a PSP game can skyrocket that is ) . Also , a great example for good sales on low price is Patapon . The game is a quality one ,  but IMO it would have strugeled to reach 100k if the prce wouldent have been 20 $ .... now the game is at 200k and still going well . 

The PSP hardware and software sales would improve if a new redesign would come ( not a big difference : maybe built in memory , longer lasting battery etc. ) at a 150$ pricetag and if software price would go down officially from 40 $ to 30 $ .... it may not sound much , but many games would get a second chance IMO :)

I agree partially hunter_alien, if the price of the psp were to come down that would help, but they are bundling in stuff like Family Guy and Daxter and a memeory card in one, Star Wars and some other stuff in another, and God of War and Superbad and something else in the new bundle. So that is why they have the higher price tag, along with using it to offset PS3 losses. They may cost more but the bundle adds the value to offset it.

I totally agree though that $40 for a game is to high. Portable games cost nothing compared to console games to develop and most companies are able to turn a profit at $50 on consoles yet they need $40 to turn a profit on the PSP? That makes no sense.

 Yeah , but the bundles cost 200$ , while stand-alone PSPs cost 170$ ... It would help alot if bundles would cost 180$ and the PSP 150 $ :)