Competing with cable and satellite TV in the DVR market would be VERY difficult. It's not just that other companies aren't doing it very well...they just aren't doing it. TiVo is arguably the best one out there, but even with their subscription fees they lose money EVERY quarter. They are finally resorting to licensing their software to cable providers. And once that becomes more widespread, it would be even more difficult for Apple to play in that market. Apple could undoubtably do a better job of it. They might even be able to be successful at it; but I don't think they'd be the "billions" of dollars successful as Mr Wu predicts.
The $12-15 dollars of incremental cost to make Apple TV a DVR also show much lack of knowledge. First, you'd need a much bigger hard drive. 160 GB is the minimum for any DVR. The larger Apple TV has that, but then you also need room for syncing your iTunes content. You also need better video circuitry. Currently, while Apple TV can output 1080i, it's actually limited internally to 720p (fixable with a firmware update?). You also need to be able to support the MPEG formats the cable company uses, which Apple TV currently does not support. Next you need to add the hardware for the cable hookup, CableCard slots, and tuners (dual-tuner is a must have). And that's just to meet today's standards. By the end of the year, CableCards will be obsolete technology. How will Apple TV support two-way communication for SDV and OCAP? For that they'll need to add a communiations module. And that's just to get it to work with cable not satellite.
And in response to a few of the other posts...there is nothing the studios can do to prevent Apple from building a DVR. So Apple wouldn't need their "permission" or to obtain "rights" as some have suggested. However, it might upset the studios enough to negatively affect Apple when it comes time to negotiate for iTunes content.
I'm not saying Apple won't do it. But I'm very skeptical that DVR functionality is what will make Apple TV mulit-billion dollar market. Most people will continue to get the DRV service from the cable/satellite provider.