It's hardware. The crappy Matsushita drive won't release any data unless the region code matches the code the drive has locked to.
No firmware replacements either.
It's just so ironic that I can burn it to a new DVD as region free, and it'll play fine!
edit: someone downmodded me for stating fact ;) fun fun fun
You should be able to play any DVD with VLC. The region-code is just a flag that Apple's software pays attention to. (Unless it's enforced by hardware now, which would be insane but not surprising.)