Below is a video of how it works. It’s in Japanese, but you’ll get the basic idea. The interface itself is great! What it does is connect to other PSP’s in Ad hoc mode via the PS3’s PlayStation Network. You can also chat using your PS3 too.

Sad thing though is that you need your PS3 “wired” to the net. If your PS3 is wirelessly connected to the web then this service won’t work … nice logic there. But if you want to try it out it should be on the Japanese PlayStation Store today.

Ad hoc Party Beta launches on Japanese PlayStation Network

NeoGAF has a list of compatible PSP games here