Rich, give people some credit- even average Joe's are not as limited as your post would imply. When they bought their HDTV, they were probably educated about what "full HD" means right there. And while the technical meanings in that are many, the one thing that almost always stands out is a number- 1080p. Much like people understand other computing tech numbers, pretty much bigger is almost always better (faster processors, more processors, bigger hard drive, more ram, more megapixels, etc).
I hold the opinion that as soon as even the most average of average Joe's goes out to buy his first HDTV, probably the ONE thing he actually soaks in is resolution info, where, once again, bigger is always better. Even the (usual) dummies at the TV retailer leverage resolution as one of their first punches to move their customers to buy an HDTV.
If average Joe's were lacking/uninterested in resolution, there would be little reason to pay up for BD players (and they're selling pretty well). There would be little reason to pay (more) to (re)buy their movies (again) in BD. There would be little reason to pay up for 1080p camcorders, but they also are selling very well. The market has chosen 1080p as the standard; Apple is just clinging to some minimal derivative.
So, while I can agree that there are always some who think analog SD cable is HD as soon as they hook up their cable (sometimes because the program opens with "in HD (where available)", I would suggest the crowd of average Joes who have actually purchased an HDTV (the market for

TV devices) likely grasps the concept, and does not buy into an idea that 720p is good enough (because Apple says so).
I've got a tech "average Joe" neighbor who recently purchased a 1080p set. Comcast hooked it up in such a way that only the analog SD signal as getting displayed. He came to me telling me about the set confident that something was wrong: "the picture looks pretty good, but not nearly as good as the HD I was seeing at the store". I took a look, fixed the cabling, put the TV in the mode to default to the HD signal source, and boom, the difference was obvious. Even (many) average Joes can tell.
Sales of BD players and other

TV-like boxes with less functionality or elegance than

TV (but offering 1080p playback) somewhat support this stance. Else, one could take the "good enough" stance with everything Apple makes. No need to update those iPhones, they're good enough. No need to build new Macs, they're way beyond what the average Joes use them for now. Etc.
1080p will be THE standard for a long time. The ability to deliver hardware that can support this max standard has also been available to Apple for a long time. Handicapped 720p is only a stepping stone for now, and apparently mostly hooked to Apple deciding it is good enough, and a bunch of Apple (is always right) fans agreeing with them.
In the meantime, every other link in Apple chain- from shooting with 1080p camcorders to importing and rendering with iMovie to databasing and playing 1080p in iTunes ALL supports 1080p NOW. Just this one link- the last link to the HDTV- is still limited for no great reason other than Apple deciding 720p is good enough.
Apple is not always right.
- Apple says we don't need BD drives, but BDs 50gb storage on a thin,small disc would sure be nice
- Apple says we don't need Flash in the "ultimate mobile internet device" but that means lots of website features in the present are not going to work at all (not quite an ultimate experience)
- Apple says we don't need an isight camera in a device that is supposed to be traveling around with us wherever we go
Etc. Then, when Apple rolls out a feature it previously said we didn't need, it is heralded as a breakthrough by Apple (recall when Intel chips were junk, until they replaced PowerPC; recall how video on portable devices like iPods were undesirable until Apple rolled out iPod 5 with video; etc).
I appreciate the pro-720p arguments while Apple has chosen the limitation of 720p for us, but it doesn't change the fact that 1080p is well within reach (for a couple of years now), and issues like storage space become less of an issue every day, as ever-greater storage comes available at increasingly lower prices.
IMO, a 1080p

TV would yield a significant upswing in sales, as what is probably the #1 buyer obstacle would be cast out of the way. Who really wants to over-pay for 3+ year old technology that is incapable of maxing out the #1 benefit for the new HDTV someone just bought?
It's "a hobby" because it's not a major seller. However it might not be a major seller because it simply lacks a few features the market expects to roll out any day now in a next-gen version. Apple could find out pretty easily by doing what it does with everything else it makes- a modest hardware refresh. In the meantime, all those people that decide to embrace 1080p BD players and other

TV-like boxes are entrenching
other options NOT connected to the iTunes Store in their living rooms.
Given the massive entrenchment of iTunes itself, I bet a lot of those buyers would at least give a next-gen

TV more consideration if it just had a few important features lacking in the current model.