Prior to the release of the AppleTV in 2007, many people were expecting a DVR or at the least an optical drive, but with neither of those functions present in the AppleTV at its release date, it was left with only purchased shows, movies, and Youtube to give it a reason to exist. There is no question that the iTunes store itself is the sole reason the AppleTV has done as well as it has so far, but it could have done so much better from the beginning with a way to sneak into users TV cabinets. DVD functionality would have been enough for most users, DVD discs are nearly ubiquitous now and users would have no problem spending a little more for a device which could be used with iTunes and Youtube in addition to playing their already purchased movies on DVD. Blu-ray could have accomplished the same thing, AppleTV supports the required HDCP/HDMI connection, and users may well have been looking for a Blu-Ray player already, so if the AppleTV were an option for these people, they may have decided to spring for one instead of a less feature packed device from Sony.
DVR functionality was never a real option for the AppleTV. Analog cable is common, but is of poor quality and presents significant problems for hardware design due to the requirement for digitizing video in real time. Digital cable is a better choice due to the fact that signals need only be written to the hard drive without digitizing or otherwise encoding them, but digital cable suffers from significant problems as well. The only way to ensure that the AppleTV could be used with all digital cable systems would be to support CableCARD security, which has a reputation for being a complete mess even for the cable companies who support it. This would put Apple in the position of being responsible for the support of another company’s security system, something Apple is unlikely to agree to. To date the TivoHD is one of, if not the only third party device to support CableCARD in this fashion, but again Apple is unlikely to go this route, particularly since they seem to view the internet as the route of choice for media. Satellite is also of high quality but as of January 2008, there are no standalone satellite DVR boxes being sold. The DirecTivo, which integrated Tivo service with DirecTV, has been discontinued for quite some time now, and unless the DirecTivo comes back most satellite DVR boxes are going to continue to be completely integrated OEM designs sold by the service provider directly.
In a way AppleTV was released before it had a clear purpose, but with the newly released movie rental store, AppleTV may be able to recover from some of the disdain people have for the device at this point. There is a definite comparison to be made between the AppleTVs movie rentals, and pay-per-view on cable or satellite. History has shown that people are quite willing to pay for the ability to conveniently watch new movies and events on these services, provided that the price is right. But cable and satellite boxes are devices most people already have around, while AppleTV still needs to get itself into users houses somehow.
If Apple wants to move more aggressively into the living room they will have to go after the main source of programming on users TVs, which is typically network tv shows. Sure iTunes sells tv shows, but if users bought shows at the same rate they watch tv in a typical week, they would be spending hundreds of dollars per week. Apple could in fact turn the AppleTV into a sort of IPTV device, complete with advertising inline with the video, but they would face significant opposition from cable and satellite providers who would likely play little part in this sort of future. Cable companies have always wanted significant control over content, and Apple moving in on their turf would put companies like Comcast in the position of being mere data carriers.
For now AppleTV will probably do better, but it will never be the center of a users home theater unless it can replace the numerous other devices users already have.