I'm not talking about the AAA developers here, they operate on a whole other playing field. I'm talking about the small studios who produce the bargain titles. Even though Nintendo has tried to cater more to indie developers through the eShop, the barrier of entry can still be viewed as steep for studios who are putting out their first commercial title ever. It doesn't matter the industry, every dollar counts when starting a new business.
You hit the nail on the head earlier about there being more smartphones in the wild than there are handheld gaming systems. However, until there's a touchscreen that can truly replace the d-pad, there will always be a demand for a traditional handheld gaming system of some sort in order to play certain genres of games. I did appreciate the experiment that Sony had with the Xperia Play. It just didn't catch on as expected.