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iPodTouch/Phone

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Recently I've been reading up on how alot of people think the iPodTouch is moving into the handheld market. I've read a few articles about it and have noticed there seems to be a lot of people thinking its really going to happen.
Personally I would be inclined to disagree. I understand the hardware takes in profit for Apple but the games dont take in much profit for the developers. The games are average at best too. They're like flash games bar a small percentage. And I know the arguement the iPod/Phone can potentally appeal to a larger audience that the DS, but i dont think it holds as much strength as people would want you to think.
For the iPod to become a major player in the games industry, they need to buy a few development studio's and get AAA titles out that will sell the hardware. Software that will sell the iPod regardless of it music and video playing. To do that they need to spend money, which they dont want to do. However Apple do market the iPod as a solid handheld.

I want to know what you think? Do you think the iPod can compete against the DS and PSP?
On a side note I have all 3 so to me it doesnt really matter what happens. I think Nintendo have the market wrapped up purely due to their ablity to innovate when a bigger company comes on to its turf.

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