I personally love the hardware. I think their main objective hardware-wise should be to focus entirely on making the device more affordable to manufacture and be aggressive with the price cuts. They need to get this baby to 3DS price levels if they can. The core gamer demographic (12-30 year old males) would go for the Vita over the 3DS every time if it was the same price.
I would take a two fold strategy with software. Step 1: Focus on the big dogs (Call of Duty, Madden, Gran Turismo, Assassin's Creed) and make sure Vita versions are AAA entries and not gimped versions. Use bundles to move hardware. A Call of duty Bundle or Madden Bundle should be a given (the game needs to be AAA-calibur though).
Step 2: Focus on Indie devs. They made XBLA what it is and yet Microsoft mistreats them. They work hard and their budgets are cheap. Throwing some financial assistance (dev kits, all-expense paid dev workshops, and publishing deals) their way could go a long way. The budget for a AAA game nowadays is in the 10's of millions. For much less then that the Vita could become the hottest indie platform around and with that comes tons of free positive press on every gaming site, podcast, and message board, not to mention tons of goodwill with gamers.
I would ignore the middle segment (medium budget games from big publishers), that segment will go where there is money to be made. If the big titles are on Vita as well as all the buzz generating indie titles, that middle segment will come as well.