1. Sure Java - like all of it's ilk - isn't a performance daemon. That said, Google is focussed on getting Dalvik as good as it can be because (obviously) a 5% speed up in it means a corresponding speed up for most/all apps - and it's good bragging rights. Secondly, PSP was a 333MHz processor - modern phones are 3-4x that, so I would politely suggest that this could very well make up for Dalvik's overhead. (Sorry iOS fans, I'm sure a similar argument is true for that platform)
2. Slightly spurious argument - surely you could say some of the same about PC graphics cards - I bought a "state of the art" GF460 January last year and that's been superceded nearly twice over. And if you're targetting for a wide range of devices (see your point #1) then I fail to see this being an issue. Oh and your concern here hasn't stopped NVidia - they have the "Tegra Zone" on Android for devices using their Tegra2 and Tegra3 chipsets. Note, these apps purport to be
optimized for those platforms, but run on a variety of devices using those chipsets.
3. Again, if people were happy to spend "hours" looking at a PSP's screen then - excluding stupid touch controls - why should a phone with a larger screen be an issue. Note the exclusion - serious phone gaming
imho requires something other than screen controls - Xperia Play is a good first step, but I much prefer the idea of a dedicated gaming dock.