"Cinavia" watermark protection

[NiQ1234]

So except for hardware makers that also produce content (i.e. Sony, and I see that the Playstation 3 was one of the first devices to incorporate this), why would any hardware makers want to support it in any way?

Might be forced on them (i.e. if you want to manufactured a licensed Blu-Ray player that can play commercial discs you have to enforce Cinavia).

I'm trying to understand how Cinavia watermark works... the wiki article seems to say that it somehow encodes an imperceptible distortion to the audio, but the distortion is encoded in just the right way that means any subsequent re-recording or transcoding of the audio will amplify the distortions and degrade the sound quality? Is my understanding correct here or am I way off? Does this mean a bitperfect FLAC transcoding of the audio would preserve the original imperceptible distortions?

https://en.wikipedia.org/wiki/Cinavia

Also how does Cinavia get into mkv files? Is Cinavia defined in the codec specification somehow? So if a BD is encoded as h.264, does this mean Moving Picture Expert's Group (MPEG) worked with Cinavia so that any MPEG decoder should/must recognise Cinavia encodings?

FLAC preserves everything. If you encode FLAC and decode it back you get the exact original audio 1:1, so it obviously preserves watermarks.
Furthermore, Cinavia was designed to survive pretty much everything. Mind that one of the uses is to prevent theatrical bootlegs recorded with a camcorder or even a phone. In other words, even if you play a Cinavia protected disc on your TV and then record it with your phone's built-in microphone, the Cinavia watermark would still survive.
It's known that you can prevent the Cinavia signal from being detected if you increase the pitch of the audio by 15% but that would obviously distort the audio (not too much but enough to be noticed by some). DVDFab also includes a Cinavia removal tool, though they never disclosed any technical details and I haven't personally tested it and checked whether it's effective or whether audio distortions are audible. Mind that removing Cinavia always means filtering and re-encoding the audio signal, so some degradation is inevitable.
The best way to deal with Cinavia is to use a player that doesn't enforce it. If you don't need UHD, a PS3 modded with CFW is the best choice.