Gamers are already getting out of the physical shtick. I only want/need physical medium for specific games. which is not most games. Most of the time I don't want to haul around 16 UMD discs. Hell when it comes to physical, if I really want it, ill just buy a specific memory card for the game and slap on a sticker.
UMD was a bad idea then its a bad idea to keep the PSP limited to it now. Its still all digital bits anyway. Once you get out of that physical mindset there is absolutely no difference between a game on your memory stick or HDD and the game on a UMD or cart.
EDIT: BTW I just downloaded FFVII for my PSP and am loving it.