Ok, keep in mind that this is a guess…
If I share a DVD drive from my PC to the WDTV Live and play a store-bought DVD that does not have CSS protection (I own a couple that came that way from the manufacturer ), the WDTV plays it fine.
If I play a store-bought DVD that does have CSS protection, then it doesn’t play.
So, obviously the WDTV doesn’t De-CSS the .vob streams.
My guess is that it’s a licencing issue. When you bought the player, you didn’t pay any CSS licencing fees, so WD would never be able to add CSS-decryption playback to the player.
And since WD would be unable to add unlicenced CSS decryption, then even if they did add support for USB DVD players, your player presumably wouldn’t be able to play any store-bought DVD’s. Which makes adding support for DVD players seem somewhat pointless, ya know?
If you’d have to decrypt the disc anyway to be able to play it, it’s faster and less clutter, to decrypt it to a hard drive, than it is to burn it to a DVD.
The whole reason I bought my WDTV, was to NOT have stacks of discs everywhere, and have to dig through them and find the one I want. I bought it so I didn’t have to play DVDs anymore.