Nice points, all.
DivX/XviD and codec support.
Let's be real: these are the codecs of pirates. Yes, more legitimate uses have sprung up but by and large the mainstream world is ignoring these codecs. Apple supporting them would be akin to saying "we don't support pirated content" while winking and nodding. Yes, it would be a pain to have to re-encode the content you have, but think about how you got this content to begin with and you can see why Apple can get away with ignoring it. Technically, h264 is roughly as good (some say better, some say worse, I don't want to debate this particular point). Given that, and the fact you can't expect WMV support (Microsoft's fault more than Apples), what important codecs is the Apple TV really missing? Real? Real is a solution to a problem that doesn't exist anymore, so why even bother with it? I never even come across it anymore...
...
So, if I got it right, the Apple TV is not useful to you if a) you hate iTunes; b) you have tons of Xvid/DivX files; c) you refuse to watch a DVD rip without surround sound d) your home-theater/lving-room set-up isn't really all that better than your Mac's screen and speakers. Otherwise, the Apple TV can offer all your computer media in your living room, with an interface superior to any alternative solutions, which is at least potentially useful to a lot of people. Is that fair?
No, this isn't really fair.
Sure, DivX is used a lot for piracy. However, I have a tonne of stuff I've recorded off the TV over the years that is in DivX - encoded before I'd heard of H.264. Should be great re-encoding that. Other people are in the same boat.
Outside of the US there is no iTunes movie store. The best we can legally get in H.264 format are some Pixar shorts and music videos. Not really compelling.
I have a kick-arse surround sound system - so yes, if I'm going to have to rip my DVDs to H.264, I want full surround sound! Why should I be restricted to stereo only?!
I don't hate iTunes. I use it for all my Music. Tunes = Music. I have all my movies in my Movies folder - that is what it is for. Or at least used to be before Apple decided to make iTunes do everything. So now I'm forced to put all my movies/TV shows in to H.264 format, and put them in to iTunes, so I can watch them on TV. There is something wrong here.
Imagine back in 2001 - Apple released the iPod. Steve got on stage and said "This is the best portable music player ever! It plays AAC format music only". Everyone's music back then was in MP3 format. No one would have been willing to re-encode all there music to AAC format. And yes, most people I know had a fair amount of pirated MP3s - and Apple knew that too. So Apple supported MP3s. Later it supported both MP3s and AACs.
All Apple had to do with Apple TV was have it play some more formats that are in common use (and play surround sound, which I can't believe Apple would be stupid enough to leave out, and hope that is an error). As I said earlier, the 720p only can be overlooked (though is poor from a marketing point of view). I had seriously been really looking forward to Apple TV.
In fact, the only thing that seems fair to say is that Apple TV has a great user interface. Everything else ties to you to H.264, iTunes and stereo sound. I wouldn't say Apple TV is the worst product ever from Apple - but it certainly is one of the weakest products released while on Steve's watch. I think Steve was too busy playing with his iPhone and didn't pay attention to what the Apple TV group were doing.