Surely the iOS phenomenon (and Android & WP7) -- particularly the iPod touch -- shows that for handheld gaming a chunky controller isn't necessary.
As Gruber often points out, where _is_ the iPod touch competitor? This is likely to be too expensive to compete with the iPod touch, and too chunky/niche to compete with iPhones and other smartphones as a platform in its own right. And that's what Sony needs -- an iOS-like platform, not this strange bit of hardware.
It's pretty sad that for a company that has built some of the most popular consoles of all time, all they can come up with in 2010 is the mutant child of their controller and a generic smartphone.