A true Apple TV, screen and all, will be doomed unless Apple can speed up their back-end. The problem with watching iTunes content is that it takes several hours to download a one hour TV episode. Unless they invest in their data center and get it working fast, they will not be able to support streaming. No one is going to wait 4-8 hours to watch a one hour show. I have tested this out -- it is not my ISP. It is Apple's data center. It takes several hours to download a 1.5 GB episode. It should take 45 minutes. Even that is not acceptable.
I have to admit, the quality of an iTunes HD program is superior to a Netflix HD program. The Netflix HD has the proper resolution. It is HD. However, the motion is jerky and there is the "black problem". Basically, to save data, anything that is dark becomes jet black. It makes it easier to compress. So things like shadows, dark greys, dark browns, etc. appear to be black. Also, the entire picture is darkened to make for more blackening. Compare the same content on iTunes to Netflix. You'll see what I mean. iTunes is clearly superior. Sometimes it is worth the time and expense...
The truth is, most people won't notice or care. It depends on what you're watching. Something like Breaking Bad, which has amazing cinematography and breathtaking scenery of New Mexico, is noticeable. If it is some sitcom, it will not be noticeable.
I am interested to see how Apple deals with this. I don't think people will tolerate an entertainment ecosystem where they have to wait 4-8 hours to watch a 1 hour program. The predictions of bandwidth increases have not come true. Indeed, with the recession, ISPs are offering worse service than a few years ago. They are maxing out their data centers, and during peak hours you get a trickle. Sometimes you can't even watch Netflix... My ISP even admitted to this. I complained about the speed, and they said because people are downloading a lot, during peak hours, it slows it down for everything. Imagine that! People DOWNLOADING with their Internet service?!? What's next? Will people be making phone calls on their smart phone?!?
BTW, Netflix, despite their beat-down over a year ago, still takes in more money than Apple's iTunes video business. That's with a subscription service, where people can watch all they want for $8/mo.
That's another problem. Are people really going to pay $4 to watch a movie that they can watch for much less on Netflix (maybe have to rent the DVD or Blu-Ray). Or $22-40 for a season of a TV program? At that price, Apple is competing with cable, which offers 1080p quality and no waiting... I'm a cord-cutter. I ditched cable to save money, as I wasn't using it much. iTunes is an expensive hassle...
All of these factors limit my iTunes consumption. 70% of my online viewing is with Netflix. When the new shows come out in the fall, I restart my Hulu Plus subscription. For most shows, I don't care about commercials or slight defects in quality. I can enjoy The Office or Parks and Recreation, with the limitations of Netflix or Hulu HD. For something like Breaking Bad, I'll do iTunes. I don't want to wait, and I want to see it in the best quality possible. And yes, I don't mind owning it. I'll watch it a few times...
I am writing an article for my site on dealing with iTunes downloading issues on the iPad and iOS devices. There's some tricks you can do to optimize the download. It should be up tomorrow or in the next few days...