The Apple TV is a set top box which integrates with the Apple iTunes Store and the iTunes application running on a Mac or PC on your local network. It can play movies, music, view photographs and has limited Internet connectivity with YouTube, Flickr and MobileMe. Here is what I think Apple should do with the Apple TV concept:
1. They absolutely have to do more on the Internet. Plex and XBMC are media centres that run on the Mac and PC. They provide access to BBC's iPlayer, Vimeo's videos and Netflix amongst many other available plugins. By producing a similar system with the ability for 3rd parties to supply plugins to their sites, the Apple TV could become a serious contender for an all-in-one Internet TV box.
2. Be able to manipulate the settings on the AppleTV from the master iTunes instance, much in the same way that is possible for iPhones. It is frustrating to have to put in all your settings for Flickr accounts and MobileMe using an Apple Remote. Make it easy and allow them to be set from iTunes.
3. Sync settings to all your AppleTVs. Not many people have more than one AppleTV (I do…) but this would not be hard to do and would make the experience better.
4. They need to support 1080p soon - I believe the current hardware is not capable but I could be wrong.
Apple could, however, absorb the Apple TV into the Macintosh range very easily by:
1. Abandoning the current hardware and replace it with a MacMini form factor. The current hardware has the occasional performance problem (usually when syncing with iTunes) and could probably do with a boost.
2. Abandoning FrontRow on the Macintosh and consolidate it with the Apple TV software - having one code base has to be better.
3. Allow other Macs to use remote iTunes libraries in the same way that Apple TV's do today - so play counts get updated properly and one iTunes library is considered the "master".
By doing this, the MacMini would become a media centre product (of course it is, sort of, already) with a DVD drive. I know several people doing this already but they are using Plex or other software to view their videos and media.
Apple are resisting the urge to put Blu-ray drives in their products and I suspect this is because they believe Blu-ray will be killed by downloads very soon. I think they are probably right.
Anyway anything like above is unlikely to happen soon - everyone is waiting for the new product announcement next week and it is, speculatively, going to be a tablet personal computer. We'll see.

What Apple need to do to the Apple TV