They can!
applesticker said:
we need an iPod that can decode and auto scale large video content -cos these videos are too small when played back on a big screen they look crummy as you can see compression artefacts

also when will the ipod support direct tv recording

and furthermore more codecs please like xvid and divx - what a bummer it is a shame to see apple pandering to the video companies instead when they can make a better product.
Somewhere, I saw an article on the video chips Apple is using, they are more than capable, but it seems that Apple is purposely throttling back on it. (at the Apple Store, I tried loading one of my videos I ripped from Tivo, but iTunes didn't load it on the iPod because my resolution/bit rate was too high - looks like a software lock. Played fine, though, on the computer...)
This makes it attractive for the studios, as it won't cut into profits for cable, satellite, tv network, theater, and DVD.
Heck, if it was possible just to download my shows the day after airing, and on top of that view on TV or burn DVDs at a decent quality, I would cancel Dish Network, Tivo, and stop buying DVDs altogether...