Sony is hurting pretty bad right now. It started before the economic downturn when they realized people just don't want Blu-Ray. The PS3 recently outsold the Wii in monthly sales for the first time ever (Nintendo is already looking to drop the price on the Wii to fight back). And now, the PSP.
I have a PSP. I have approximately seven games for it, making it the smallest collection in my video game library. I actually have more games for the Fairchild Channel F than I do the PSP (I would have eight, tying it with the Fairchild, but I took my copy of Puzzle Quest and smashed it with a hammer).
Sony decided to try linking its game systems to movies. The formula worked with the PS2, after all. People like me, however, weren't interested in the unit as a portable movie machine. Lots of people have iPods for movies. Some even have Zunes (chuckle, snort). I have a GP2X and my IBM S10 for portable movie watching. Not only that, but we watch movies we already have on disc and have converted. The PSP was selling movies for the same price as a DVD with no special features. The AV cable doesn't work with the discs. I bought it thinking I could play Worms on a TV, and nope. Pictures, home videos on the memory stick, and MP3's only. At one point, IIRC, there were five times as many movies as there were games on the system. And it's supposed to be a GAME SYSTEM!
Lack of good softs is part of the problem. The next part is the lack of interesting softs. Say what you will about the DS, people are trying different things with it besides the steady flow of shovelware. Brain Age, for example. Sony never would have tried that, they only want existing versions of their stuff like God Of War and that.
I've said it before and I'll say it again -- the UMD drive was a mistake. Moving parts drain the battery faster, and the proprietary UMD that no one else can use or burn stuff with, etc? No sale.
You can hack the PSP firmware to run homebrews. Or you could cheat and just get an older PSP game like Lumienes II which has a full firmware installation to downgrade the unit and play homebrews. Or you can pay Sony three figures for the right to run homebrews.
The PSP is the ultimate indictment of hubris. They were so confident the confluence of technological history that made the PS2 so dominant was actually how things were instead of how they worked out that they didn't bother making a unit people actually wanted. The only thing they did right was skipping the country lockout (my copy of Puyo Pop is from Japan). But rather than admit they screwed up, especially with their divisions positioning themselves so far in the red, they blame piracy. In order for there to be piracy, you have to have something people want. I think this is where Sony's little red choo-choo done jumped the tracks.