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i don't own a psp but i'll make a guess.
psp is more like a media device than a gaming device.
you can play videos, music, blah blah...
I think people get distracted and don't really look at the gaming part.
The weight and size and the fragile-ness doesn't make it "too" portable.
I personally hadn't seen anyone carry a psp with some sort of enclosure to protect it, in turn increasing its size.
You really have to have a dang big pocket to actually pocket it.

other reason that i usually hear is that psp is basically a handheld ps2. why play on tiny screen when you can enjoy the exact same thing on a big screen?

and if the game is release on both platforms (psp/ps2), how many are going to shelve out the cash to buy the same game twice?

To me, however, would have to be battery life. If I can hack a game and play it on memory stick instead of the umd, I'll play it on memory stick which loads faster and at the same time doesn't drain battery life.

UMD is an example of shoving media format down consumers' throats. (I would love to see a new design that do without the umd)

Attach rate of 2:1 is horrible. People only buy 1 game per year? ouch.