The Apple TV is a great product. I get a fair amount of use out of it. It has its quirks but I think that it's a good start.
Combining Airport Express with the Apple TV seems somewhat feasible, depending on what impact it would have on costs. Others have suggested two products. The current model plus an Apple TV combined with the Airport Express. That's also pretty reasonable.
The other stuff about the UI needing a refresh are givens I think.
Ultimately, I think Apple TV getting its own section is a sign that Apple is about to make its move. The SuperBowl a week after the 30th anniversary of the Mac would be poetic.