I own a PSP and also an Xperia mobile phone.
Cellphones are really ages from being as competent as dedicated handheld gaming devices such as the PSP or DS for that matter.
The Xperia, with all its muscle and style still failes to deliver a gaming experience worth anything close to even a GBA.
I must admit however that the iPhone (which is, by the way in my opinion, a very mediocre cellphone) has come closest to being a cellphone/gaming device. I'm thinking specially about a certain game with the name "Sparta" in the title. Still, it's far from being comparable with a PSP or DS. For example, virtual buttons just don't work for intense gaming, you need some feedback on the thumbs. Imagine playing SF2 on the iPhone.
If Sony had agreed on letting SE do this today, it would only end in disappointment and tons of critism for batterylife, size, weight, heat, etc. Not to mention the price for such hardware.
The Playstation brand has an image of quality gaming products - this decision makes sure that it will stay that way.
I think that in maybe 10 years from now, things will look better, and maybe then we will see a PS phone, with OLED, long batterylife, 15min charging time, low weight and muscles to make it all happen.
But as it is today, I think Sony did the right thing to protect the image of an already troubled brand.