I think go was too ahead of its time. Good idea, but not the right time and certainly not the right implementation. But putting out an ONLY digital download psp with no umd support in the middle of the psp's life cycle -- alienating a lot of potential legit software buyers -- was a fool's error.
They should offer a physical format drive as well as place an emphasis on digital download. Offer things on the psp digi download service you can't BUY on umd or anywhere else, like with ipod apps.
I think emulating apple is their best bet more so than emulating the ds, though they should keep the ds and 3ds close to heart. Because iphone/ipad are already in line with what the psp set out to do to begin with: create an portable machine that does everything. By offering apps, user content, the ability to play mp3s, the ability to watch movies, play casual (possibly get support from iphone/ipad devs) AND core games. You'd have a machine that really does EVERYTHING -- except 3d

They also need to ditch xmb for psp and include touch screen and internal hard drive: no more flash card drive, less piracy. Sony could go either way here, and it's pretty exciting because I want to know what they're going to do AND because I have a feeling I'm witnessing a trainwreck slowly happen before my very eyes.