According to tear-downs, the Apple TV only has an 8GB solid-state drive to store media. That's not very big at all.
That's only 2 movies and 7 shows -- not much at all. But I guess that's acceptable, since the Apple TV is pulling most of its content from your home computer or iPhone via AirPlay, the new software that lets your phones and computers share content with the Apple TV on the big screen.
Looking at my iPad, I see a total of about 1.5GB of apps -- and I have exactly zero games. If this were an Apple TV, we'd already be running out of room very quickly: only 4.5GB of space for video, and 1.5GB of it stolen by apps. That leaves just 2GB for video; now we're really running out of room. Add the "killer" apps for TV -- games -- and suddenly the device is way over capacity, even with just a handful of content to show for itself.
Wired has said that they believe the Apple TV will be able to share its content with other devices, but that doesn't make much sense, because there's almost no room for Apple TV to store any media -- especially if apps are in the mix. Wired says:
In other words, you should be able to share media from the Apple TV to your iPhone, iPod Touch or iPad, whereas originally we thought we'd only be able to do the converse with AirPlay. This functionality would be comparable to a Slingbox or an EyeTV.This means there are only two options. Maybe Apple anticipates very few (or no) 3rd party apps for TV, but wants it to be able to store some of its own content, acting like another "node" of music/movies on the family network. Or perhaps the Apple TV will run apps, but will rely on your iPhone or PC to stream its video. These are the only explanations for why the Apple TV is so anemic in the storage department.
It would make sense if the Apple TV proved less "smart" than its brethren. Developers who have dug around inside the Apple TV's codebase have found that it identifies itself as the third "family" of iOS devices. Obviously, "family" is a technical term, and doesn't imply there are other Apple TV-like devices in the works. But it does confirm that this version of iOS is qualitatively different than the one that runs on iPhones/iPods (family 1) and iPads (family 2). I'm guessing this taxonomy is partially based on capability. Perhaps families 1 and 2 are "smarter" than family 3, a group that can't run apps.
It may be that Apple is actually planning to have Apple TV simply mirror apps being used on a nearby iPhone/iPad. Lowtide.app, which is the internal name for the Apple TV's user interface, has been shown to be capable of running in the background of an iPad. This means it could emerge and take over the screen of your iPhone or iPad once it senses the Apple TV has been switched on, making it like a big a remote for the Apple TV. It may also share your iPad's screen with the Apple TV to run apps on your TV in huge HD glory.
Apple clearly believes that the television of the next ten years is merely a dumb display, not something you interact heavily with. They mustn't envision users spending a whole lot of time interacting with the device, except to queue up video they've downloaded on their other devices. The Apple TV, it seems, is just a slave device: no wonder it's only $99.