He's not saying anything about scaling up at all. So let's try to simplify.
If this
TV had 1080p playback...
Everything that is in place now would still be in place, meaning those wanting to use this as a rental device, could still choose the 720p or SD file in the iTunes store to rent. They would be downloading the exact same file size in the exact same bandwidth. Because better hardware can play lessor software to the fullest, the end result is that any 720p30fps you rent would play to it's fullest quality, every bit as good as it will play on an

TV with hardware maxed out at 720p. No changes. No bigger files. No bandwidth issues (if there's no bandwidth issues "as is" now). Etc. In short, the "720p is good enough" crowd
would get every bit of the exact same experience, with nothing more forced upon them, much like you're not forced to buy only software that runs on quad-core chips, or you are not forced to use tethering in an iPhone, etc. Can we all grasp that? Slightly better hardware would deliver the exact same experience as it will be with the "as is" hardware now.
For those with any 1080p content- which can come from many sources including BD & HD-DVD rips, 1080HD Camcorder home video, Vudu, YouTube, some Vodcasts, Movie Trailers, etc, this hypothetical version would also be able to play this kind of content. So these people could choose to rent 720p or SD content from the iTunes store too, AND they could also play their 1080p content. Apple gives us all the tools for creating and storing 1080p content. For example, my own desire is to take 1080HD Camcorder home movies I've been shooting since 2006 and have them available to play at full 1080 on my 1080HDTV. iMovie will let me edit and render them in 1080- no problem at all. iTunes will database those movies just like they are 720p or SD- no problem at all. They'll play in iTunes just like a 720p or SD movie- no problem at all. How can I push them from there to my 1080HDTV. There's the problem. Here's that chain...
1080HD Camcorder -> iMovie -> iTunes -> __________ -> 1080HDTV
All the links in that chain support keeping the home movies in 1080HD. What can I put in that blank? As is, the choice is to hook my computer to the HDTV, but that's a temp solution at best. A 1080p

TV is the missing link.
Bandwidth-fixated people should understand that content already on your home hard drive will play on

TVs too. It doesn't use any Internet bandwidth to pump your home iTunes content to your

TV- been doing that for 4 years now, with nary a single iTunes rental. We use our Apple TV like crazy- maybe as often as daily- yet we barely use any bandwidth in doing so. As a matter of fact, if I went outside and cut our Internet cable, it would have almost NO EFFECT on our primary, regular- probably daily- uses for Apple TV. Can the "but the bandwidth..." arguments be addressed any more clearly than that?
So very simply, a 1080p version of

TV
- would not require your Internet bandwidth to improve at all
- would not require all video content in the iTunes store be available only in 1080p
- would not require you to buy bigger hard drives to store massive files
- would not require those happy with the "720p is good enough" arguments to concede some kind of defeat, nor in any way have their vision of how this thing will serve them be impacted- everything would be exactly the same as it is with this hardware "as is"
- would not be a waste for those that can see the difference- or think they can see the difference (they would still buy something to do what they want it to do)
- would not necessarily cost any more, as evidenced by an abundance of competing boxes WITH 1080p hardware priced <$100. However, I would bet the "1080p or bust" crowd would be willing to pay more for this ONE benefit in some kind of "pro" version anyway, so the affect on the price target psychology is probably not that big of a deal to those seeking MAX HD quality (we probably paid more than the "low price target" when we bought our 1080p sets too).
In a nutshell, a 1080p

TV would be an HD player that covers ALL of the HD standards instead of barely covering just a portion of ONE of the HD standards (it needs to include 720p60fps to cover the whole 720p standard).
This wouldn't force all content in the iTunes store to become 1080p content, big downloads, massive files, etc. All the content in the iTunes store could still be 720p and SD. Someone with even slower internet connection- where a 720p file might be too big/slow to download- might choose the SD version to fit their situation (bandwidth). Someone else with more bandwidth- or patience- who would want to go for a 1080p download should some Studio decide to test 1080p content in the iTunes store, could still choose the file type best suited for our own situations: SD, 720p or 1080p in that test. Thus, everyone could go with whatever is best for their own needs... which seems much preferable to having Apple- or some of you- arbitrarily decide that one thing is best for all people.
For years, we've had iPods with the hardware to play lossless audio. What has it been, maybe 5+ years? Did that force all music in the iTunes store to only be available as much bigger lossless files? We had tethering built into our iphones long before it could be supported by software. We've got all kinds of hardware & software advances built into new Macs that are not yet fully exploited by available software- even Apple's own mainstream software. This is no different.
What makes no sense is that the "720p is good enough" believers still get every bit of the experience they want in either scenario, but they still want to argue against the idea of others wanting anything more, like it in some way would harm them, damage their experience, etc. It wouldn't. Had this one rolled out with 1080p playback capabilities:
- the 720p files sizes, bandwidth usage, rentals, and consumption experience would have been EXACTLY THE SAME as it will be now
- the "1080p or bust" crowd would have also found what they wanted in this device
- Apple would have sold more units to both camps, instead of just satisfying one camp
Who loses in this scenario? Who gets hurt? Nobody. It's win:win:win for all 3 parties. Yet, there's this crowd who seems to only see things exactly as Apple chooses to serve them, so anything else- including INDIVIDUAL WANTS- can't possibly make any sense. That's sad.
All that said, this device "as is" is great. If you've never owned an

TV, it will be a fantastic addition to your AV stack. Any one major benefit it offers is easily worth $99. I've paid much more than that for just a CD jukebox player, to just have pseudo random access to my music collection. This does all that kind of stuff soooo much better. However, I also can appreciate the desire for a video-oriented device to max out current max video standards. For 4 years I've enjoyed my

TVs maxed out at 720p24fps. I was soooo hoping the 2010 edition would deliver a little more on the video side than just 6 more frames per second. I still need something to plug into the blank in that 1080 chain up above. As is, it looks like it has to be a Mini. Or I have to accept down conversions to 720p30fps at best.