Microsoft is doing A LOT of things right, aside from the faulty hardware, its not just luck. XBL cannot be beat, for example.
As for the PSP, it sells 'well enough' and honestly is LESS of a flop than the PS3. With games AND hardware for handhelds costing less than consoles by a large margin these days there is definately room for two handhelds in the running, even if the PSP sits permenantly at #2. Unfortunately reality suggests they will gut the PSP scene if the PS3 scene gets tough enough.