I suspect UMD failed as a movie format simply because there isn't much of an audience for portable movies.  How many people spend 2 hours or more one public transportation on a regular basis?  I did at one point in time, but I suspect I was an exception to the rule. 

Sony's talk about allowing PSP to TV connectivity reinforces my theory.  I personally don't see the point in such a movie.  The movies look HDTV quality on a small screen, but their resolution is well short of that of DVDs, and UMD movies tend to lack the extras of DVDs, so in terms of viewing in one's home, UMD movies are a poor alternative to DVDs (and soon Blu-Ray and HD DVD).

Of course, the fact that the post-launch dry spell (of games) broke last Christmas with the release of games such as Burnout Legends, Virtua Tennis and Liberty City Stories also did UMD movies no favors.