As a proprietary carrier for PSP games, that's all very well; after all, cartridges (from the Atari days onwards) were no more designed for interoperability. Sony, though, had bigger plans. Hence it became a Universal Media Disc, capable of holding various types of content, and playing them on... well, one type of machine. Someone at Sony noticed that personal media players were the next big thing and that the PSP would make a dandy one of those. Of course, letting people rip their DVDs to a PSP would be Wrong and Sending The Wrong Message (and, more importantly, illegal; even if Sony locked the path down with all the DRM they could muster, the very fact that the process involved breaking DRM at the ripping stage would guarantee litigation), so, instead, PSP owners would be able to get their fix of legitimate movies and videos on UMD.
In an alternate future somewhere, fashionably connected e-consumers go down to shops, plonk down two-digit sums and buy UMD copies of their favourite movies. Perhaps they cost a bit less, because, after all, the resolution is considerably lower than a DVD; or perhaps not, because the convenience of re-watching your favourite Friends episode on the bus outweighs the fact that the picture is not as detailed as a DVD. Of course, you can't watch your UMDs on anything other than your PSP's pocket-sized screen, but that's OK, because in this reality, everybody buys two copies of everything: one for the plasma-screen and one for their PSP. Much as every household in this reality has two copies of the latest Coldplay album: one for the living-room hi-fi and one for the SUV stereo; making a copy would, after all, be wrong.
However, this reality, with its radically different laws of economics and human psychology, is not our reality; and consequently, the UMD movie format looks to be on its last legs. Stores are removing acres of shelf space devoted to UMD movies and studios are cutting their losses and cancelling UMD releases. Even Sony's practice of bundling UMDs with DVDs (at a slightly lower markup than buying both separately) failed to breathe life into the format, and it now looks set to become dead media. As expected, a Sony executive tries to blame those thieving users with their Memory Sticks and piracy-encouraging video iPods, though without much conviction.
A future version of the PSP may have a TV output (provided that Sony can convince the Hollywood studios that such an analogue hole won't threaten their precious intellectual property too much), though that may not be enough to get people buying UMD videos in droves and breathe new life into the format. If UMD video dies, that will further cement the Universal Media Disc's claim to being the world's most ironically-named media format.