I think AV is far more than a hobby, but they're gimped by the MPAA/studios.
The RIAA allowed Apple to distribute digital music files with DRM, so I can imagine it wouldn't be too hard to persuade the MPAA to allow DVDs to be ripped so long as the resultant file was DRM'd too - but of course Apple want you to rent/buy the film from them, so until they realise that people don't want to rebuy their collections I can't see this appearing. The ATV preset in Handbrake really is pretty fool-proof for most discs so with a bit more fine-tuning on the gui end (ie help with multiple soundtracks and soft-subs for people who get nervous at phrases like "patch" or "command line") that could indeed be a one-stop app for ripping.
1080p looks like being the dominant format for the foreseeable future so the next version of the ATV should at least support it, even if films at that resolution come later.
Internal drives will always fill up and be superseeded by larger models. I'd like to see the future ATV with 16 GB or so of flash/SSD for the OS/buffering and a replaceable HDD so it could function without a HDD as a pure streamer or users could upgrade the drives over time.
On the software side, the interface is really good (bar the odd caching/slowdown problem), but an App store (more likely, a widget store) to allow Hulu and iPlayer apps to be provided by 3rd parties if they want to would be really good. The whole point of the ATV is to stream files, so the obvious thing is to allow streaming from NAS units meaning you don't have to leave your mac on but how about also being able to stream from ATV to ATV if you have more than one - this could also function as a WiFi backup for the disks - seeing as they are always on. Building on this always on feature, how about adding airport express functionality - ie the ATV acts as a wireless bridge and further items (eg Xbox 360) can connect to the network port and join the WiFi network.
Finally, Apple need to finally move away from the idea of having files stored on one computer - allow the ATV to act as a media server and adapt computer software to keep up (ie in iTunes X and iPhoto X your libraries are on a shared drive) - they could even market it buy saying - the more ATVs you buy, the more backups you have!
The current model could be marketed as a pure streamer - I'm sure most people would hang on to theirs for a secondary TV, but I'm sure it could be soft-updated to include some new features (such as widgets, AP express features and ATV-ATV/ATV-computer streaming).
Like the Mac Mini before it, it's not dead...I can imagine heated debates between Apple and the movie studios are raging as we speak.