So today over lunch, 2 friends and I did some A/B and blind testing. I had the following version of Dark Knight Rises:
1. iTunes HD
2. Blu-ray
3. Blu-ray ripped via MakeMKV and encoded with Handbrake and played through iTunes (high profile setting, RF 18, same as source FPS with constant framerate, strict anamorphic, no cropping, DTS track encoded to 5.1 AC3 at 640kbps)
Both iTunes versions were played from my MacBook Air iTunes homeshare to an ATV3. The BD played on a PS3. TV is a 47" Sony LCD/LED with a 5.1 setup. Decent quality floor standing L/R speakers with matching center and surrounds. Mid-range Denon receiver. Everything was HDMI of course. The iTunes copies played their AC3 audio and the BD bitstreamed the DTSHD track.
I set up the blind test so we played the first several minutes of the movie, up until they blow the tail end off the plane. I played the BD first, then the iTunes HD, then the BD encode. Both of them placed the iTunes HD copy dead last in video and audio quality, especially audio. There was significant dynamic range missing in that 384kbps AC3 track. Bane's voice, other voices, music details, effects pop were all noted as being weaker. My one friend who is a musician commented on hearing additional instruments in the background music in the BD that he didn't note in the iTunes HD.
After the blind test we jumped around a doing A/B comparisons. Chapter 7 was a good one as Lucius and Talia walk inside and then ride the elevator down. This was a good one to compare because it was 2.35:1 in both the iTunes version and BD. Watch this scene and look to the right side of the image where the floor mat is. In the BD, the area of the floor gets dark, but keeps detail all the way down. You can make out the floor mat all the way. In the iTunes HD though, you lose all the detail in the floor. It turns into muddy blackness.
The Handbrake encode in both video and audio was much closer to the BD than to the iTunes copy. One friend noted that he'd be happy with the encoded quality, but the iTunes copy was just too low fidelity to make reasonable sense having spent money to create a good quality HT set up.
We didn't get into discussion on the merits of convenience of access or cost relative to the quality levels we observed.
I think we are going to run the same test with Jaws next week.
From what I saw and for what I plan to install for a HT in my new house, I think it pretty much seals the deal to stick with BD rips playing from a NAS to a streamer box like a PCH/Dune/etc and use the AppleTV for non-major film watching (TV shows, documentaries, etc). Given how soft and less detailed the image was on a 47" screen, it will only look more so on a 70" - 90". I also plan to spend more on audio than my friend has which should also bring out even more tangible detail.
In the end though, no one thought the iTunes HD version was bad. It was just not as good, and very tangibly so. If that was all you watched, you might even get used to it really. For me, I'll sit there watching a movie knowing that the presentation is a few steps down and that would bother me.
Also in summary, the BD Handbrake encode stacked up very closely to the BD. There were some differences still noticable in audio and video (that chapter 7 elevator ride showed it) though. Still, if you're going to take the steps to buy the disc and rip it, you may as well just rip to MKV and keep the full quality, unless you really need to compress for space and don't want to mess with a box outside of the AppleTV. But then you have to deal with having a computer running to serve an iTunes home share and take on other complexities. If you encode with these settings too, you get a file size for most movies that's not really portable. It's really a higher end encode for at home viewing. The DKR encode was 8.4GB, for example including a 256kbps 2ch AAC track with the 640kbps 5.1 AC3.
I need to dwell on this a little more. I'm growing convinced that between iTunes and BD for me, iTunes loses for the system I plan to integrate this winter. Regarding the question of BD 1:1 via PCH or BD encoded on AppleTV, I'm still weighing those pros and cons.