I had a few problems with several of the responses in this thread, so I thought I thought I'd make a few points.
The PSP is over 5 years old. It took iPhone four iterations to become a serious contender in the portable gaming market, and it still lacks in some very important areas like draw distance, fill rate, and poor textures. The PSP had accomplished portable gaming before anyone knew what an iPhone was, and it has only gotten better by leaps and bounds without a fundamental change in the PSPs internals.
While having many different media options on your iPhone is great, it isn't detrimental to the success of a dedicated gaming platform. As technology grows, there is obviously a great market in utilizing as many media functions in one device as possible, but as evident by the DS, there is still a market for dedicated portable gaming devices. The main gripe with the devices is their size, but this again goes back to the point that they are more than half a decade old. It is evident that portable devices will be more portable than ever in the next generation with the release of the PSP Go and iPhone 4. Lets not forget that the PSP was the one of the smallest, best connected, media devices at its release. And while everything wasn't perfect, it sold better than any other Nintendo competitor since the beginning of portable gaming.
Lastly, there are plenty of games that received low-average review scores that are still incrementally more in depth and fulfilling than many of the highest rated iPhone games. In fact, PSP has the highest percentage of good/excellent games in its total library than any other portable handheld. the PSPs game library is a perfect example of quality over quantity. From Burnout and Twisted Metal, to Resistance, Dissidea, Little Big Planet and Crisis Core, to SOCOM, God of War, and Metal Gear Solid series, the PSP has made a mark in portable gaming history, and I imagine the next iteration will most definitely achieve (and quite possibly exceed) the same reputation.
FPSs have come a long way since the release of the original PSP, and I think these games alone (with dual analog sticks) will lift the PSP2 well beyond the iPhone gaming market.