its like asking is a wrx better than a hummer? the answer depends on the purpose
I don't think this is necessarily fair. In fact, your statement about the PSP is a perfect example. The PSP was designed primarily as a game system. But how often do you see anyone playing games on a PSP? Everyone I ever see with a PSP is listening to music on it or watching movies (in contrast to DS users, who, whether or not they can do other things with their DS, actually play games on it). In fact, I've seen people carry around both a DS and a PSP so they can watch movies on the PSP and, unbelievably, play games on the DS (only).
The PSP was designed primarily as a game system, but it was also designed to be good at playing movies and music. Why did it go so far in that direction? In terms of games, it is clearly not because it was underpowered -- by that logic it should have displaced the DS. Because it doesn't have a touchscreen? Please... the touchscreen game market didn't
exist until Nintendo created it. It was not because Sony cannot create an ecosystem / keiretsu of game designers, because they can do that too. It's because Sony was unable to lure the kind of designers who make games people want to play on handhelds.
Nintendo is the
only company that has ever really succeeded in the handheld market. And so while their formula isn't the only one out there, it's the only demonstrated one out there. And their formula undeniably places a low emphasis on things like graphics hardware and a high emphasis on games designed from the ground up for a handheld consumer.
So I think, based on Nintendo's formula, nothing that's lacking on the iPhone prevents it from really succeeding in the game market. Not even the lack of controls, if they can get the right designers to make the right games for the App Store.
So unlike a Hummer, which will never win a rally race against a WRX, really in any circumstance, I think it's feasible that Nintendo could carve a significant niche for itself in handhelds (in which everyone is really a niche player anyways).