The specs are here. The "TV Compatibility" section says "Compatible with high-definition TVs with HDMI and capable of 720p 60/50Hz".
So, to take advantage of your highest-def content, you need to bypass or work around the AppleTV in your media cabinet? Whose idea was that?
The fact that 1080p isn't widely streamed yet because it's big may explain it, but what about people whose interest in quality leads them to buy those BluRay discs Jobs says no-one will want? Has Jobs just decided that he wants to try to Betamax the physical media in favor of downloads?
If so, it could work – those discs are a nuisance to juggle in and out of players, and anyone with kids knows what happens when they get handled and scratched – especially as transmission speeds make transmission of full-scale content easier over time.
At some point, though AppleTV needs to support the resolution demanded at the high-end, or lose the business of folks who care about seeing the quality for which they bought those big flat screens. At the moment, though, Apple is aiming at the mass market and at the capability easily supported by its existing in-house chip supply.
Next year? New chips, new performance envelope.
The careful student of Apple spec sheets will notice that the device has no user-accessible storage. This isn't the AppleTV of yesteryear, that was basically cross between a Mac Mini and a Time Capsule that played shows on your TV; this is essentially a video-enabled Airport Express. Storage is as big as you like – on your computer, located somewhere else on your network, away from your TV, not cluttering your entertainment center. AppleTV isn't being obsoleted by file sizes; that's a hardware problem for you to work out with your PC vendor. AppleTV is not a stand-alone solution, it's glue in a chain of Apple products.
The lesson? Apple is not trying to build the Lisa any more (intended to be perfect, but ending up overpriced), it's trying to build for the mainstream. Apple has learned from the iPod and the iPhone that a volume business that aims where the demand is now is more valuable to Apple than aiming where the business will be in 10 years (*cough*Newton*cough*).
Apple is growing up – including with product positioning strategy. AppleTV is not a costly part for Apple to build and will involve modest investment in stock; Apple need not sell huge volume to make money on it. Apple is in a position to help Netflix get streamed content to your TV (a problem for Netflix I noticed when I wanted to stream flicks, and ended up watching on a laptop), and makes both your TV and your Netflix account more valuable. Apple is also able to offer ad-supported content from other sources.
Soon, you will be free of your cable bill: you will stream news and you will save the subscription cost in favor of renting the handful of shows you actually watch. That horrid DVR your cable company saddles you with will go back to the land of ugly products with lousy UIs, and your TV will act like an Apple product because Apple will provide the portal to everything you want to watch.
And all for $99.