Don't discontinue AppleTV
So I think the dificulty here lies in the fact that if the MacMini was combined with AppleTV then Apple would discontinue 2 products to release one new one and how would they market it?... "everything the MacMini and AppleTV couldn't do combined into one box for your ease of use!"
I don't think Apple should kill off the Apple TV and the Mac Mini to replace it with one product. Rather, they should just beef up the capabilities of the Mac Mini a little, and position it to complement the Apple TV.
Apple TV - Good for somebody who already has a Mac or Windows computer running iTunes and wants to listen to music, watch movies, etc. on their TV or entertainment system. "
An iPod for your TV" Price $299 for 80 GB and $399 for 160 GB models.
Mac Mini - Similar functions to an Apple TV when hooked up to an HDTV and entertainment system ("Front Row" is the interface), but also provides full computer functionality (just add your own monitor, mouse, and keyboard.) Includes DVD and extra I/O over Apple TV, and runs full OS/X "Leopard". $599 - with "Santa Rosa" hardware, 160 GB hard drive, 1 GB RAM.
Mac "Media" - Similar to Mac Mini, but optimized for better gaming. Faster processor, dedicated graphics chip, larger hard drive and more RAM - $799.
Mac "Media" Pro - Similar to Mac "Media", but adds HD-DVD/Blu-Ray combo optical drive. - $999
If Apple would introduce a lineup like this next year, I think they'll have a lot of options to combat anything that Sony, Microsoft, Tivo/Amazon, or the cable companies can come up with.