First version of Apple TV is a stepping stone
I still do not see a point to the Apple TV. If it was also a DVR, I'd toss my Tivo in the trash instantly. Without it, what on earth would I want to watch? I'm not going to buy TV episodes that I can watch with Tivo for free, how many YouTube videos can you really want?
Ok so my family comes to visit for Hanukkah once a year. So I can play a few videos and show a couple pictures, neat. Besides that, what is this thing really good for? Am I just completely missing the point of it?
Partly, I think.

I also wish the Apple TV was a DVR and/or less expensive, but it's not. So, what is it?
I compare it to the Airport Express, because the wireless music streaming is the #1 reason I've considered buying an Airport Express.
The Apple TV provides ALL music-related functions of an Airport Express (which sold for $129 prior to Apple TV being announced), but with VIDEO and CONTROL over the music, so that you can select your music FROM your Entertainment Center instead of having to run back to your home office or wherever to change what's playing. That's worth a lot. Granted, it doesn't have the wireless router functions of the Airport Express, but I already have a wireless router, as do many people.
Unlike Airport Express, it also lets you play VIDEOS, MOVIES, including home movies, TV shows and movies you've downloaded, etc (that's worth another $100, IMHO) and lets you view PHOTOS (maybe worth a little more...$20-30?). It has a hard drive in it to buffer these movies (and possibly photos, too?) so that they'll play smoothly...that's an expensive component. It's also 802.11n, which is more expensive. Components to support HDMI are hardly cheap, I'd guess.
Is it worth $299? Maybe, maybe not. But it's clearly worth more than $150...that's only $20 more than the Airport Express, and adds video.
I fully expect that they'll do one of the following within a year:
(1) Allow you to run Mac OS X (or a limited version) from Apple TV using a Bluetooth keyboard/mouse (there is a USB port on it for a dongle) either with OS X running directly on Apple TV *or* using something like Remote Desktop or VNC to access a remote session on your Mac (or maybe PC, too, if they used VNC).
(2) Add DVR support
(3) Sell games that play on it, again using the USB port for a controller connection.
(4) Drop the price by at least $50.
I really think Apple is primarily targetting people who are tired of paying $50-100 per month for cable TV or satellite when all they really watch or care about is 1 or 2 shows. Drop the cable/satellite, buy an Apple TV, and now you pay $1.99 per episode (typically $8 per show, per month) and can watch them any time you want, easiliy streamed to your big TV without dealing with a DVR, VCR, or big cable bill. Just like iTunes allowed consumers to cherry pick the GOOD songs off of a CD, iTunes+AppleTV allows consumers to cherry pick the GOOD shows off of TV, instead of paying $50-100 and having to sort through (and pay for) all the crap.
I also think AppleTV is an obvious stepping stone for Apple supporting video RENTALS. Remember....Apple TV can stream QuickTime previews DIRECTLY from Apple's web site. What's to say they won't announce that you can now stream MOVIES directly from Apple's web site (via Apple TV), for let's say $3 each. The movies could be stored on Apple TV's internal hard drive, which makes it harder for people to illegally pirate them (similar to people renting a DVD/VHS tape and copying it before returning it). Apple TV could manage the "rental" process, storing the movie for the agreed-upon rental time. You can watch it as many times as you want during that time, then it's automatically deleted. Perhaps as an option, you can pay and extra amount of money to be able to keep it (ie. rent-to-own).
Personally, I think that's where they're headed, and this first release is just "Part 1" of the plan.
We'll see!
Craig