Digicipher and other proprietary systems?
Don't think you've missed something. 


  How do they keep these systems from being broken by someone just looking at the information in the smartcard that houses the key?


Those systems have indeed been (and frequently are) broken via Hardware reverse-engineering. Therefore I would chime in with your "not secure". OTOH: decrypting AV signals isn't like trying to break national security or anything. Multiple black-markets exist where you could (but legally shouldn't!) get rebuild decoder-cards for almost any system and channel(s). 

As indicated, the law is the strongest protection for Pay-TV providers. The signal is merely "crippled" to keep the masses from intercepting and decoding them without additional hardware and (illegal) efforts.