This is just an example of what I would say is the correct approach.

PSP2: Quadcore A9 + Best graphics (SGX543MP4) + 2,300mAh battery = min 5hrs usage time.
1600x960 Resolution = great pixel density on 5", plays 720p HD content, can output games at 720/960p.

PSPhone: Dualcore A9 + Beast graphics (SGX540) + 1,800mAh battery = min 7hrs gaming time.
800x480 Resolution = good pixel density on 4", same game from PSP2 can be naturally scaled back (only quarter the resolution) so developers need only to make the game once to target both platforms, allow content played at 720p but not the native games (sluggish response if they're graphic heavy)

Making the PSPhone use less resolution, means less processing power necessary, means less battery drain (and more battery for other tasks like telephone), means smaller battery, means smaller device, means pocket friendly, means a viable solution!