Q:

Is there a viable method of DRM that prevents recording the final stream?

I would like to create encrypted media (mp3 and mp4) that will need some form of authentication to playback. Would prefer playback on VLC, but a custom player if necessary. Or a customized version of VLC. And should be local. No streaming.
The problem however is that I've read a number of threads and articles on this and most seem to suggest that at the end a user can simply record the final stream . eg using stereomix
What are the viable options, if any, to prevent this or at the least, make it extremely difficult? 

A:

Protection against screen capture software is one of the most difficult goals for any DRM client implementation to accomplish, due to the extensibility and flexibility of a modern computer's graphics system.
My team performed a set of experiments on this topic a few months ago and we found only one DRM client implementation that was able to prevent screen capture: Microsoft PlayReady running in Internet Explorer 11 via HTML Encrypted Media Extensions.
This configuration resulted in a black rectangle being recorded, instead of the video picture.  Using Microsoft PlayReady in other media players (e.g. a Silverlight browser plugin) also failed to protect against screen capture, so this level of protection is specific to the implementation built into Internet Explorer 11, at least today.
You can try out Microsoft PlayReady in the successful configuration here: http://ie.microsoft.com/testdrive/html5/eme/
This approach would not, however, fulfill your requirements regarding media format and "no streaming". Such a scenario is not directly in scope of modern DRM technologies, so I recommend you re-architect your solution. Use DASH as the video format and stream it (e.g. even locally from the same computer) to a web app based player. This is a setup I have seen before on projects that need local playback while still enabling use of modern media delivery and DRM technologies.
The field of DRM technologies is fast evolving as new technology vendors (Google, Adobe, Apple and others) enter the mass-scale DRM market in order to grab a slice away from the market leader (Microsoft PlayReady). Thus, it is worth re-testing such results every now and then.

