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The Axim is superior in almost all aspects of watching videos over the PSP.
Videos on the PSP that are saved on the memory stick are limited in resolution, which means you will never get pixel per pixel perfect (480x272) videos like you do on the Axim. I believe you are limited to 320x240 and then having to stretch to full screen, or some variation on that.
Flash memory is also much cheaper on the Axim.
The only exception is that UMD videos look amazing on the PSP. But I'm sure you don't want to spend the $$$ buying UMD's that cost more than the DVD counterparts?
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