I understand that Sony makes money on the games, not the system. But try to follow my logic here.
Sony wants to sell lots of games. To sell lots of games, they need the PSP to be popular. Everybody has to want one, really badly. It has to do stuff that nothing else can do. You have to get people REALLY excited about the system, because nobody's going to pay $300 for a system unless they're positive it's worth it.
Now they certainly have an interest in making sure the games cannot be copied. Like you said, that's where they make all the real money. So an iron-clad copy protection scheme is to be expected. They also have reason to prevent movie and music and emulator piracy. After all, other parts of Sony produce CDs and DVDs. But in order to sell systems (and thereby sell games) they shouldn't make this protection too tough. Just tough enough so nobody can say they didn't try.
If I were in charge of PSP marketing, I'd have a team working on SNES, Genesis, GBA and N64 emulators already. When they were done and the PSP was released, I'd "leak" the emus under a fake name. What better way to sell your system than by "giving away" your competitors games. 1500 launch titles, anyone? As far as music and movies, they can't honestly expect people to re-buy anything in the new format. It's silly to even pretend that's going to work. Without a writer, video playback is a non-feature.
The problem is that Sony is not as smart as I am. They don't have the balls to REALLY make this the walkman of the 21st century.