Sony Not Working on PSP Phone—but Maybe It Should

The rumors this weekend caught like wildfire: Sony was thinking about combining its PlayStation Portable gaming system with a Sony Ericsson mobile phone to take on the iPhone.

AP Sony PSP

Great story — and it came from a reputable source, Japan’s Nikkei business daily — but sources inside Sony tell CNBC it’s simply not true.

That hasn’t stopped the Internet message boards from brimming with excitement — and maybe that should be a clue to Sony of the potential for such a device.

The fan base of Sony’s PlayStation product is an extraordinarily loyal one. The PlayStation 2 has sold nearly 100 million units worldwide and the company has sold nearly 50 million PSPs. But the Apple iPhone is quickly becoming one of the bigger threats to all of the gaming industry’s console makers.

The system offers roughly 12,400 games for download at the App store (an increase of nearly 1,500 in the past month). And the recent introduction of the 3GS and price cut of the 3G model to $99 could push many fence sitters to buy the device.

A PSP Phone could help Sony gain further traction in the mobile gaming market — and might just give it the boost its needs to catch up with Nintendo’s DS and DSi systems.

Sony has certainly shown a revived interest in revamping its handheld gaming system in recent weeks. At E3, the company unveiled a redesigned PSP, the PSP Go, which will rely entirely on digital downloads.

• CNBC.com Special Report: The E3 Gaming Conference

Other than that and cosmetic changes, however, the PSP Go does not offer any substantive advances over the existing model. That isn’t preventing Sony from charging an $80 premium for the new system — a move that has analysts questioning whether the PSP Go will catch on with audiences.

A PSP phone could turn heads — and not only with consumers. Developer excitement would likely spike as well.

Game publishers have shown strong support for the iPhone, with Electronic Arts , in particular, showing tremendous enthusiasm for the platform. Sega, Square Enix and Capcom are also working on iPhone games.

Should Sony decide to enter the game phone market down the road, it would bring along some of the industry’s biggest franchises, including "Gran Turismo," "Ratchet & Clank" and "God of War". While those games would help distinguish the platform, the key to the success might be the company’s PlayStation Network store.

Currently, PS3 owners can download games, movies and TV shows through the store. This multimedia functionality would rival what Apple offers with the iPhone.

What the company currently lacks is the ability for users to create their own games and applications, which has been one of the core strengths of the iPhone.

Developing for the PSP is a complicated process, though, meaning Sony would have to make toolkits available to garage developers.

If Sony decided to move forward with a PSP Phone, it wouldn’t be the first collaboration between two of its successful units. The company has already combined its Walkman MP3 players with Sony Ericsson to moderate success.

Whether it decides to make a game-centric phone or not, though, Sony needs to formulate an alternative for customers who are leaning toward the iPhone. And selling a more expensive, tweaked version of a year-old product probably isn’t going to do it.

© 2009 CNBC.com