If a small screen was so bad for gaming the PSP wouldnt exist
Those games are mostly designed with a small screen in mind. The device is also designed to be held a lot closer to your eyes then you can with the other setup.
There you have to hold a controller and get close to a screen that is attached to the back of a 360. Not including the power adapter that limits your locations.
You also have to be careful of viewing angles.
These type of setups work best when used as a desktop but most people buy them for the portability and the shared power supply.