All forms of portable gaming -- cellphones included -- are popular in Japan. Dedicated portable gaming devices will outlive home consoles over there, I would say.
As far as the iPhone goes, I have one, it's nice for a 5-10 minute distraction while you're put waiting for something, but it's not something to spend much time with. It's not going to give you a great experience like Mario or Dragon Quest can. Dedicated portables may not be as popular going forward, but there will always be an audience for them. The DS is the best-selling and most successful game system ever. The iPhone hasn't done much to stop it from selling 400k+ each month in the US!
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Simplicity is the ultimate sophistication.