The issue is the so-called "DRM" isn't just the encryption of the harddrive files. The DRM protection also includes the watermarks in the video images that survive the HDMI capture. If pirates don't want their $2000 Kaleidescape player blacklisted and bricked, they have to figure out how to remove all forensic watermarks (the invisible low-level "noise" in the image frames) so the illegal copies can't be traced back to that specific compromised player.
It's not impossible but it raises the threshold of difficulties. E.g. using differential analysis to reverse-engineer watermarking now requires buying TWO players for $4000 instead of just one for $2000; and paying for 2 download rentals instead of just 1. And add hours of analysis work on top of that. DRM doesn't have to make piracy impossible; it just has to make the cost/effort equation not attractive. For now, the Kaleidescape DRM scheme is "good enough" for the cost/effort equation to not make sense for pirates.
I was talking digital. The output has to hit a device that does something with pixels at some point. At that stage it isn’t encrypted. (Think ribbon cable to LCD, or equivalent). No reason why an FPGA or some custom hardware can’t grab that, just requires engineering effort.
