In a nutshell the problem with Apple TV is not what it does or how it does it, but what it doesn't do. Some of this is country specific: there are no TV show rentals in the UK iTunes store so they have to be bought and downloaded on a computer then streamed to Apple TV. A licensing problem rather than Apple's fault, surely? No. In being so small the second generation Apple TV has stripped out the hard disk meaning no downloads. There is 8GB of NAND flash, but strangely this is reserved entirely for cache. The result is the Apple TV is still heavily dependent on the computers in your house and needs them to be switched on for everything other than renting films or browsing YouTube and Flickr.
This limitation is just the tip of the iceberg. The move to an iOS core (despite no App Store access) has seen it also adopt the same Apple A4 chipset (ARM Cortex A4 CPU, PowerVR SGX535 graphics) as the iPad and iPhone 4 meaning it isn't capable of 1080p video play back. Whether you see this as essential or not, it's an embarrassing omission for a media player released in late 2010.
Can you overlook the lack of storage, 1080p content and TV rental? If so you'll need strong stomachs to make up for the most fundamental flaw in Apple TV: its codec support. Apple has built its success on providing beautiful user experiences within tightly walled gardens and why Apple TV has struggled up to now is because this is diametrically opposed to the freedom required in building a good media player. Apple TV supports just H.264 video encoded in M4V, MP4 or MOV as well as AAC audio, MP3, Apple lossless, AIFF, WAV plus JPEGS, GIF and TIFF. Compare that with the WDTV, which arguably kicked off the renewed interest in media players in 2008 - codec support reads:
Audio - MP3, WAV/PCM/LPCM, WMA, AAC, FLAC, MKA, AIF/AIFF, OGG, Dolby Digital, DTS
Photo - JPEG, GIF, TIF/TIFF, BMP, PNG
Video - AVI (Xvid, AVC, MPEG1/2/4), MPG/MPEG, VOB, MKV (h.264, x.264, AVC, MPEG1/2/4, VC-1), TS/TP/M2T (MPEG1/2/4, AVC, VC-1), MP4/MOV (MPEG4, h.264), M2TS, WMV9
Playlist - PLS, M3U, WPL
Subtitle -SRT, ASS, SSA, SUB, SMI
There is simply no comparison, especially with 1080p video support also included. Yes you can't buy content through the player directly, but you can buy content from ANY online store (including iTunes) on your computer and stream it or connect an external HDD and it will playback just fine.
Then there's the issue of price. £99.99 may not seem like a lot given it is less than its predecessor, but there are more comprehensive rivals like the WDTV HD (£79.99), Asus O!Play HDP-R1 HD (£86.99) and Roku ($79, but awaiting UK release) which offer better value for money. Furthermore the $99.99 RRP (£62) for the Apple TV in the US means UK customers have the right to feel short changed, especially given the reduced content available.
Only the most hardcore of Apple fanatics will find the Apple TV to be a worthwhile purchase. This is a tragedy because Apple has demonstrated it knows exactly how to build a stunning, intuitive and (in the US at least) inexpensive media player that has the potential to take the market by storm. Apple's restrictive principles mean it will never likely achieve the success so easily within its grasp. Some flaws simply can't be polished out.