The PSP will never rival the iPod as a video player because it lacks the capacity of the iPod. Yeah, you can get up to 4GB if you want to spend $199 and have your PSP look like
this, but that just makes the PSP even more huge than it already is.
It's too bad, really, since an integrated hard drive, or at least an add-on that didn't suck would make the PSP a much more viable video player. Of course it would still have the problem of Sony's intentional crippling of video playback so as to not threaten their UMD movie sales, and you'd still have to rename your movies something like "M4V10001.mp4" but it would at least be a contender. (And yes I do have a PSP, but I use it for games).
As for the idea of viewing iPod movies on the PSP, that would be just too awkward for words, even if it did work.