I find nothing wrong with using a UMD format in the PSP. Yes, those little disks are a pain, but they do their job: For games only. Movies and the like, I can never imagine the demand getting so great that it changes the market. As for a digital copy only? You can keep them.. they can be much more of a hassle.
What I would like to see is some sort of mini-blueray... or another way to get more content on mobile gaming platforms