I did some more testing with Netflix. I watched a Standard Def show on my ATV3 and it paused/buffered/dropped quality the whole time. About half-way through, I switched out my ATV3 and put in my ATV2. It worked perfectly.
Definitely seems to be a problem with the Apple TV. I got mine exchanged today, same issues still. I then took it round to a friends house, as per Apple's advice, and it was still locked in standard definition at around 1mbps. My friends internet is 8mbps as well, 2mbps faster than mine.
I then called Netflix again, who told me lies about my streams on PS3 not hitting above 2.9mbps, despite a few days ago, being told its was hitting 4.7mbps+ for the highest quality. I'm running a LAN monitor right now and it proves that I'm hitting the 5mbps requirement for HD streaming. They basically tried to pawn me off to Apple again. She also kept telling me to get a faster internet connection. Unfortunately the majority of the world still has substandard broadband connections. 6mb is actually very good for where I live. But thats not the point. The difference between ATV3 and PS3 is like DVD vs Blu-Ray. Its that big.
No one wants to take the blame. Apple tell me to get it repaired, Netflix tell me to call Apple. A simple google search would point the finger at Apple, given their past reputation with Netflix issues on ATV2.
I've been thinking of just selling up and getting a Roku XS, but the tacky interface and remote really put me off, as well as the lack of iTunes Match.