There are DVD players (software) that do read encrypted discs, so I suspect that they've obtained a legitimate license. The fact that you usually have to pay for that software (or it comes bundled witih a computer) suggests that there's a cost (license fee) involved that somebody has to pay.

The VLC software looks to me like it'd make a good core for an absolute kickass home entertainment system. The tech's stumbling along and weaving back and forth, but it seems to be roughly converging on a model in which you'd have a "media server" in your house, and PCs and TVs and MP3 players et al would talk to it over a home LAN. The "imagine if you will" picture often painted uses a wireless network, and basically all entertainment devices just work anywhere you want without you having to think about it. The server connects to the Internet and accesses the Holy Grail of a huge library of movies and music and other media. The hardest thing to roll-yer-own would be the streaming video/audio, and VLC would supply that piece off the shelf.

TiVo grows up!