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It is Sony's equivalent of Xbox Live Arcade, allowing people to face off in multiplayer games across the Internet, and download original titles as well as some PlayStation and PlayStation 2 titles from the PlayStation Store to be used on the system it is accessed from.
It is automatically used when a PS3 or a PSP gets access to the Internet, meaning you can't avoid using it if you want to use the Internet for any reason on the PS3 or the PSP. This forces users to update their system's firmware if the network requires it, thus keeping cheaters and hackers off the systems.