After getting "this video cannot be played" I spent hours trying to figure it out. Luckily I did. If your using PSP Video 9 to encode , you must set the setting in the profile to max resolution of 320x240 - and the screen width the 480x272 thus the image must stretch a bit but looks good still. Just set the video wizard setting on the left hand side, and as for the sliders you can use NEW FORMAT, WIDESCREEN and leave the others at their default. THE Reason you get that error is because Sony put a max resolution for storing on memory sticks for copyright reasons I guess.
The reason people were getting the errors was the encoding was being done with no max set. setting can be found in Video tab > my profile area and then don't forget to save it.
I tried 5 videos already and have no more problems.