And iPod touch costs under $200. THAT's competitor for this demographic, not the iPhone.
As for buttons, jeez... get over it. Physical buttons are like chicklet keyboards on phones. Something demanded only by people who won't move on to the next obvious step.
And if we're comapring "doesn't have", you really don't want to go into the long list of features available on a touch that aren't available on PSP's, such as accelerometer and (as of next month probably) gyroscope.
Oh yeah... and multi-touch input.
^^
lol. This is precisely why people think iphone fangirls are annoying. Any real gamer will tell you that physical controls are the best way to play games.