I think UMD is created to target the growing hype/needs for mobile entertainment. The cellphone people are pushing video on demand, music on demand, Nintendo has been dominating mobile gaming for the longest time, Since these are all presumably Sony's ball game, launching something like UMD would unify its pockets of customers and provide the lock-in mechanism for various form of Sony devices (just like their memory sticks). This is the strategic intention.
Tactically, it addresses:
* Short falls in existing media: Memory sticks are great for personal media (saved games, photos, ...) but it is weak for keeping publishers' media, DVD is too big, mini-disc is too limited. Not enough DRM.
* Alignment. UMD fits into Sony's plan to consolidate their product line and strength in different pockets.
* Certain adoption due to confirmed needs and established channel. Just like Blu-Ray, Sony needed a media to deliver games anyway.
* Doesn't need a network because of its large enough storage.
Essentially Sony created an exclusive market for itself and can now reap its benefits (sell more stuff to the same satisfied audience). UMD movies are selling rather well (The desire to view movie in a mobile fashion apparently exists
).