CrossEyed, I disagree that a cheap and underpowered system could do well against Nintendo and Sony's offerings, not because it's a bad idea, but because I doubt there's anyone who would/could pull it off. As in, I don't think there's a company out there who's a big enough name in the game industry and has the balls to challenge the current contenders in the handheld market and can get support from the big third-party developers (who want to focus on the more powerful systems).
I think when market analysts keep saying the DS can't survive without being a phone they're comparing it directly to the entire iOS family (which is trailing the DS family by about thirty million units worldwide, at last check) rather than just the iPhone (which I'd guess is two-thirds of those sales at most) to make their argument sound good. Game systems don't need to be phones. Consolidating everything you do into one device is not the optimal solution; I for one like having my computers, phone, game systems, and music player be separate devices even if my smartphone can be all of those and more, because I'm not screwed if my phone dies like I would be if I used it for everything.
Also, no "probably" about either cost or battery life - it's definitely going to cost at least $400, and almost certainly more. OLEDs alone are mad expensive even before considering that this one is a touchscreen, and when you consider the cost of equivalent CPUs and GPUs for laptops and then consider they're making the hardware even smaller for the PSP2, well, $400 is probably a gross underestimate. And just going from the specs, it's likely that the battery life will be no more than a third of the given 3DS battery life; Wi-Fi might drain a lot on 3DS, but 3G on PSP2 will drain just as much, and you can use the battery life from a laptop using the aforementioned equivalent CPUs and GPUs to guess what kind of battery life the PSP2 will have with worse batteries.
Sony didn't say if they're still doing a specific PlayStation phone, but it looks like that all might just be the PlayStation Suite thing for Android phones and PSP2. Some new games that can be played on either platform, plus PSX emulation.
(Also, the PSP1 is already a Game Gear. More powerful than Nintendo's offering but doesn't sell as well, but isn't really a flop; has a robust library that still isn't as good as on Nintendo's system, though PSP's is way better than GG's; and has worse battery life than Nintendo's system.)