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Nintendo have made it clear that they will not roll over and die when the PSP is released. Infact I believe they are going to pre-empt(Sp?) the PSP with yet another handheld (I seem to remember someone at Nintendo being reported as saying something like "Thanks for the advance* warning Sony")
Nintendo will try very hard to kill PSP, the fact that they have the established user-base makes Sony's task an uphill struggle.
However if the PSP is able to link to the Playstation 2 then Sony can capitalise on their established user-base.
Concerning Nintendo's next console I see the GC as Nintendo's 'testing ground'. Look at the life being breathed into new licences by other developers. What are Nintendo working on? I'm betting new characters for the next console, a new image and taking a good shot at emulating the 'cool factor/generation x' crap that Sony do so well**.
I think by the end of the GC/launch of the next Nintendo console (exluding the China one!) that the Nintendo we know will be a very different animal.
Nintendo have lost a lot of territory on the console front but they will have learnt from this and will come out fighting come the next console. They know how Sony does things and have witnessed the Playstation swamp the market, this will give them an idea of how to stop the PSP from doing exactly the same thing.
At the very least prepare for a titanic battle. But who's going to be the iceberg? :D
*Pun intended
** I might not like it, but it sells.
Meh.
But I trust Nintendo can develop a product that can defeat it.