Simple solution to that is don't update it
True...but when I went through this I was jail breaking the ATV1. The apple interface was rubbish until 2.0 came along so the updates were 'desirable' for lack of a better word. That experience has coloured my viewpoint to all jailbreaks...iPhone & ATVs.
I accept the limitations that apple impose on its devices, for the simple pleasure of knowing, they just work. No issues, no question. Any problem I've experienced since then has been firewall, networks or some other 3rd party device stuffing around with the setup. And when your playing with 5 ATVs, jail breaking becomes a chore.
1 x iTunes library, running on the machine that converts, catalogues, organises & serves, accessed by 5 ATVs. Couldn't be easier.
I like plug n play...my days of experimenting, tweaking, adjusting or whatever, are behind me through choice. Cant play an AVI or a DIVX? ehhh...who cares! Mp4 or M4v is fine by me. My conversion process is so down pat now, 40mins converts in 4 mins, it really aint worth the drama of even thinking about it.