They're never going to get a significant market for games more complicated than the simple iPod games they have now.
1) It's notoriously hard to compete in the console business. Even harder in the portables business. Look at how many dead or soon to be dead handhelds there are.
2) Developers are looking for volume, not necessarily hardware quality. Unless the iPhone becomes the rip-roaring smash megahit that it currently is not, it'll be difficult to get developers to sign on.
3) If the PSP, with its lower cost, dedicated gaming hardware, and support from a company with experience in games, couldn't unseat the DS, why would Apple be able to do so?