XOR on the cable is completely fine for encryption, provided the input source sends the key to the chip on the cable. That really wouldn't be hard to implement, though it would certainly negate the intended purpose here (stopping copyright violations) since it wouldn't prevent recording boxes. However, it would provide encryption and prevent listeners on the wire from seeing the data in transit, which should be the point here.

Cables shouldn't be where copyright protection is enforced, that should be done at the point of sale. If you don't trust your customers, don't sell to them. As Gabe Newell said, piracy is a service problem, if you provide a good service at a good price, you don't need to enforce copyright protections since it's easier and less risky to just use your service.