The first thing anyone needs to realize when dissecting the performance of the PSP, or any other handheld system, is that a vast majority of gamers don't give a shit about portability. It's a perk or a novelty. It's the coolest thing about a handheld system that you will absolutely get the least amount of use out of. Now for gamers that have some actual need for handheld gaming that goes beyond playing in your bed or on the shitter, whatever their situation is, then none of the following applies to you. But for the rest of us...
The main cluster**** for the PSP has always been the continuing presence of the PS2. The PSP itself is a great piece of technology, but to a gamer, the only real difference between it and a PS2 is one less analog stick and its portability aspect, which is cool, but unnecessary. So what reason would their be for anyone to buy a PSP? The answer, of course, is the games. Unfortunately, the PSP is already logistically ****ed in that department. Let's pretend we're a third party publisher/developer. We have a nice, new concept for a game and we're going to invest millions of dollars in it to bring it to fruition. But what system to put it on? Let's see, we have the PSP and PS2, which are relatively the same save for the second analog and, of course, the 90 MILLION USERBASE GAP! Tough call there. Even if moneyhats were involved to get a certain game to the PSP instead of the PS2, I wouldn't be surprised if they were turned down anyway in favor of the much broader exposure that a game would get on the PS2 (for possible future sequels).
This is the reason why it's hard to find a quality third party game that isn't some sort of iteration of something else available on the PS2, whether it be a port, rehash, spinoff, sequel, semi-sequel, etc. The more a game relies on its PS2 roots, the less risk involved. Unfortunately that means more of the same as far as game content, which is clearly not appealing to a lot gamers.
The only solution to rectify this is for Sony to step in and provide the exclusive, quality software needed to give the PSP an identity other than it being a "portable PS2". Sony is the only company with a vested interest in the success of the PSP. It serves them to invest millions in new content and put it on the PSP. But thus far, Sony has failed miserably in that department. Until Sony shapes up, expect the same kind of content that you've seen thus far for the remainder of the system's life.
Which brings us to price, because some gamers don't mind that the brunt of quality software is based off popular PS2 franchises. What they might mind is dropping $300+ in order to play it. Realistically, at this point, there's not a lot Sony can do with the price to right the ship. Some people here are clamoring for lower priced games, which isn't going to happen. The system already has a problem with third parties not taking any risks with the content they're providing. Asking them to lower their MSRP is probably not going to help that situation. A price drop to the system would help, of course, but to what extent? Realistically the best we could hope for is a new bundle pack for $200. But what good would that really do? The start up cost is still going to be $250+. With the 360 out and the PS3 and Wii coming out in the next month, what exactly is the draw for gamers to spend that kind of money on a PSP instead of using it towards one of the next-gens? I'm afraid for the PSP it's just too little, too late.
As for advertising, the size of the unit, the battery life, etc., all that is trivial. Did it hurt that Sony had dumb commercials with rats talking about cheese? Maybe a little bit. But the fact of the matter is, the PSP is one sexy piece of equipment that basically sells itself. All it takes is one glance and you'd be hard-pressed not to have at least some interest in it. So maybe, as far as marketing is concerned, the biggest mistake Sony made was taking so long getting demo units out to stores. And again, even if Sony were to revamp their marketing campaign, what good is it going to do now that all three next-gens are going to be available in a month's time? That's a pretty tough sell, no matter how good the ad campaign is, particularly since the PSP has no momentum in the market right now.
In short, the PSP was pretty much screwed from the start. The "portable PS2" situation is one that existed well before the PSP was released, and anyone that knew anything about the market could see that was going to happen. The only saving grace was Sony and the content they provided, which might have given the PSP a different identity. But Sony's effort was and is not nearly good enough. So however you want to interpret the situation the PSP is in now, I guarantee you it's only going to get worse. I honestly don't know what some of you think is going to change to make it more successful than it's current state. You have a system which started out strong, but with every month that passes it shows no signs of improvement if not getting progressively worse. Now you have two next-gens launching in a month, taking a lot more potential money away from the PSP, but somehow it's still going to turn things around? It's not happening.