Sony has absolutely no chance of touching Nintendo. Kids are the driving force of the handheld arket, and kids like Pokemon. A lot. Thus, they will continue to buy Game Boys as long as the Pokerehashes keep on coming. The series has been through two "true" sequels thus far, and I don't see any signs of it dropping off. With Pokemon, Nintendo is utterly unstoppable. Couple this with the excellently-timed release of the GBA SP, and Nintendo's pretty much at the finish line before the race has even started.
Sony's only logical plan of action is to completely ignore the child demographic and target the adult audience. With MP3 and movie playing ability, this is apparently their plan. Even then, though, I don't know how many people want another handheld to go along with their Palm Pilots. Sony is crowing that the PSP will become the center of the handheld universe, when it's painfully obvious that the cell phone and only the cell phone will dominate. Phone capabilities are the only feature missing from Sony's Swiss Army Knife portable, and will ultimately stop the handheld from becoming huge.
Will Sony come mildly close to Nintendo's userbase? Hell no, lest they make something huger than Pokemon, arguably the biggest child phenomenon ever (though most of it's died down now, except for the games). Can they even make a profit? If they take a "loss for a gain" philosophy, losing money on each console sold, I'm not sure they can. They'd then become dependent on their software, and I'm sure lots of people would buy the console just to play MP3s and watch movies and whatnot. Thus, software remains on shelves, and Sony is in the hole, even if a fair amount of people are walking around with PSPs. Their only other option would be to charge an obscenely high price, alienating their thin-pocketed PS2 userbase.
Things will probably turn out moderately well for Sony. I'm sure it won't be a total failure, but I'm not sure we'll ever be seeing a PSP2.
Also, there's no reason to buy into Sony's BS PS specs (heh). They're undoubtedly overblown.