Feddemaster is correct its the internal memory on the PSP and not the UMD which is the problem with playing MP-3's.
The PSP has 32Mb of internal RAM of which approximately 23Mb is available to a game, streaming would take a large chunk out of this available RAM and unfortunately that would mean we'd have to remove something from the game presently to allow it to be implemented.
We do however improve the compression used in the game each year and hopefully one day will be able to implement this sort of thing (and when we do I'd like a proper GUI interface into it ala Itunes - but I might be dreaming now

).