HDCP stands for High-Bandwidth Digital Content Protection, a copy protection scheme to eliminate the possibility of intercepting digital data midstream between the source to the display. The format designed by Intel and licensed by Digital Content Protection, LLC using an authentication and key exchange procedure before video and audio is presented. Products compatible with the HDCP scheme such as DVD players, satellite and cable HDTV set-top-boxes, as well as few entertainment PCs requires a secure connection to a compliant display, the process often described as the handshake. Due to the increase in manufacturers employing HDCP in their equipment, it is highly recommended that any HDTV you purchase is compatible. Although most video devices support high-definition video over component output, analog connections are scheduled to phase out in the future or possibly forced to limited resolutions output.
Why is it important to me?
Although manufacturers are still making most products with at least component HD output, new generation of products like HD-DVD and Blu-Ray devices will limit the analog output resolution (Analog defined as Component or RGBHV). The highest resolutions these devices can output (720p/1080i/1080p) will be available on via the digital (DVI or HDMI) connections that employ HDCP encryption. Any new HDTV purchase should have a digital HDCP compatible input.
It is important to note that HDCP is currently not a standard used in PC monitors, and almost none of these displays have Component inputs. Although PC monitors are HDTV capable, HDCP encryption limits this type of use. If you use an HTPC and want to ensure dual use of your new flat panel display, look for HDCP compatibility.
How does it work?
A simple answer is that an HDCP session will result in the exchange of keys between the source and display device. The source device will query the display to make sure that the equipment is HDCP compliant before video is shown. Non-HDCP devices such as PC’s and older model DVI products will work with any DVI compliant display, but the HDCP compliant boxes will show an image only on HDCP compliant display.
Other products affected by HDCP are scalers, switchers, and splitters (distribution amps). While these devices do no authentication for key exchange, they must be able to transmit the presence of HDCP if the video is handled (processed) in any way. Due to the two different formats of digital connections, occasional inability for proper communications may result in loss of interoperability. The newer format, HDMI was designed to be backwards compatible with DVI and in most instances, the two signal types are easily adaptable, but older devices may not always work well with in-line devices like scalers or switchers. These problems can sometimes be fixed in “firmware’ although that is not always the case. Incompatibility is often displays on-screen as a snowy image or an error message.[source: Digital Connection]