Personally, I think what's killing the UMD is the price. The PSP screen measures only 4 inches across. I'm not watching movies on my PSP for a movie experience. I'm watching them to pass the time. With that being said, I don't want to spend upwards of $30 for something to just pass a couple hours of time. Ten to twelve dollars, absolutely, but nothing more.
Of course price is not a cited reason for the slow in sales. Per usual, piracy is partially blamed, as full DVDs can be ripped onto larger memory sticks. While we never endorse nor support piracy, studios (movie and music) need to understand there is a relationship between price and piracy. Movie and music studios make a ridiculous profit on CDs, DVDs and UMDs. Customers know that. As long as the customer continues to feel they're being screwed by studios, they're not going to feel guilty about getting their hands on an illegal copy of something. They feel they've already paid for it.