Yes, I love the larger PSP widescreen [Widescreen movies appear smaller or truncated on iPhone because of the screen ratio]. You have to own one to appreciate the difference.
Now that you reminded me, iPod is a great video player too. I never use it for real that way (again because of battery life concerns). The key differentiator is the iTunes Music Store and its portable DRM, which allows you to continue watching a rented video on-the-go. On the PSP, you can watch movies from the PS Store but the selection is much smaller. The UMD movies are now retailing at $10 or less (like $3 in Fry's sometimes), but they are not as well used.
Both allow some digital copies from Blu-ray, but I think iPod/iPhone has more official support from Fox.
Both also have free movie conversion software support. The storage size doesn't bother me that much since I don't carry movies around.
I'd give the edge to iPod/iPhone for its overall experience. But I actually use PSP more in real-life, and I hope for a better user experience everytime I use it.
wait I can acess the playstation store online when i'm out on the road with my psp? Or do I also need a $400 ps3 and a wifi connection some where.