Good--we don't need another PSP.
Yes, Nintendo needs a good competitor, but the PSP simply wasn't the right one. Sony spread itself too thin trying to support the PSP, the PS2 AND the PS3 in the same market. Their arrogance from the success of the PS2, their reliance on proprietary technology (UMD/Memory Stick), putting too much fancy technology in the same box (Blu-Ray, Cell) have all driven a wedge between them and developers for a variety of inter-related reasons.
Nintendo have proven time and time again in the handheld space that it's not the best technological package that makes for the best game system--it's the GAMES, the ability to pick up and play without needing a detailed manual. While Nintendo has veered too far in that direction by making games almost too casual, they've at least shown that building a platform for good gaming experiences has nothing to do with new technology.
The PSP is a great system--but it will never attract the same install base for the same reason that the Wii dominates in sheer install base > EVERYONE is buying it (a Wii, a DS), not just the hardcore gamers that Sony was so proud to have won away from Nintendo after the N64 fiasco. Have a look somewhere public, like the subway--chances are you'll see a mix of young and old playing on their DS systems, while you may see a lone 18-25 male watching converted anime episodes on his PSP.
Look back through gaming history--the majority had a SNES, not a Genesis--and that's where the developers went. The majority had a PS1 and a PS2--and that's where the developers went. Sony misjudged the market this time around, and are now eating hefty chunks of humble pie. If they are ever to compete in the handheld space again, I think they need to be much more realistic and more encompassing to the whole new gaming demographic. The problem is--and it seems like they've realized it--is that they don't want to compete that way, and the way they want to compete simply didn't work. I think the PSP will retire itself as fewer and fewer games become available for it. The hardcore will hold on tight, because emulation/etc is just too awesome..but that's about it.
Ramble, ramble. Bottom line, if they really aren't making a PSP2, I think they're making the right choice.