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(This is all from a correspondance with someone close to the DVI/HDCP development that I had a few months ago, so feel free to cite more recent sources that contradict it).
The most important part: DVI/HDCP is only used as a connection between a source and a display device. Only display devices will have DVI/HDCP inputs. STBs, PVRs and HD-VCRs will not have DVI/HDCP inputs. The data on a HD-DVD, or a HD-VCR, or a HD-PVR is not HDCP-encrypted, so the restrictions on full 720p/1080i analog output don't apply to these devices.
The downscaling restriction only applies to the conversion of a HDCP to an unencrypted analog stream -- which none of these devices are doing. They're getting a compressed data stream off the HD-DVD (or from the cable company, etc), HDCP encrypting it themselves, and then sending that through the DVI connection. They're free to take the cable stream and convert that to full-resolution 720p/1080i, because it never was an HDCP stream.
DVI/HDCP is a restriction on the interconnect, not the source stream.
The most important part: DVI/HDCP is only used as a connection between a source and a display device. Only display devices will have DVI/HDCP inputs. STBs, PVRs and HD-VCRs will not have DVI/HDCP inputs. The data on a HD-DVD, or a HD-VCR, or a HD-PVR is not HDCP-encrypted, so the restrictions on full 720p/1080i analog output don't apply to these devices.
The downscaling restriction only applies to the conversion of a HDCP to an unencrypted analog stream -- which none of these devices are doing. They're getting a compressed data stream off the HD-DVD (or from the cable company, etc), HDCP encrypting it themselves, and then sending that through the DVI connection. They're free to take the cable stream and convert that to full-resolution 720p/1080i, because it never was an HDCP stream.
DVI/HDCP is a restriction on the interconnect, not the source stream.