A while ago Kev posted a comment here about this paper that talks about Content Protection in Vista.  There is now an official reply here by Dave Marsh who's the guy that now owns video in the core OS (good guy.. once worked for Snell & Willcox).

Bottom line is that a) any OS that wants to legally play commercial content in new HD formats will have to do something similar b) when you play regular unprotected content, all of these mechanisms are switched off. 

As you'd expect, there is the predictable fuss about this from the peanut gallery.  As a consumer, I'm glad that I can play HD-DVDs on my PC.  That doesn't mean I like the increased layers of DRM that have been mandated.  I'm also not so glad that, when I put an HD-DVD disc into my DVD player it can potentially re-flash the firmware of the device if the device is on a list of compromised players.  But that's the world we now live in thanks to widespread piracy.