Well, remember what people said about the 1st iPod in these forums.
I'm sure that if Thread 500 were unlocked, people would still be arguing on how successful the iPod
will be, and complaining constantly about it.
In the end, the specs matter relatively little. What matters is how easy or not easy to use it is. People tend to want something simple, not something which can do everything. So it can't do 1080p - not many have that anyway - and it doesn't support a few formats which aren't supported by the iPod either. Big deal. If it "just works", as Apple things
almost always do, the device will be a success.
That was why the iPod succeeded - not because of its features or specs, but because of how simple it was. Microsoft and other's things
almost always don't (don't make me recount horrors of dealing with Windows, Linksys, etc.).
Now, one might ask, why has Windows succeeded where OS X has not? But this argument is invalid. Mac OS 9 and below was probably (in my opinion, from what I know about it, which is relatively little) not as good as Windows. This allowed Windows to get a user base, which is now really all Windows has going for it. Most people who argue for Windows being better than Mac (not all, necessarily) only do so because they don't use Macs and want to defend what they
do use, or work for Microsoft.
Microsoft, however, has failed to get much of a user base with their "media extenders", (I think people find them a bit too difficult to use - if it is like networking anything else on Windows, they will) and therefore, Apple has an opportunity.
If there is any market for devices like "media extenders" and the AppleTV, and the AppleTV is as easy-to-use as it appears to be, then Apple will take that market.
The market for this kind of device would definitely exist if Apple did either or both of the following: allowed the AppleTV/iTunes to play VIDEO_TS folders, or put 720p movies on the iTunes store at a price equal to or not much more expensive than current prices for movies. If the first, everyone can put their library of DVDs onto their computer (much like they would do with CDs for the iPod). If the second, high-definition video will be available easier and cheaper than buying them in Bluray or HD-DVD.
If Apple does either of those, I think it is almost guaranteed success.