The point is Apple chose the $99 price point because more people are likely to impulse buy a $99 device than a $299 device, and at the time Apple were pushing a rental only business model so internal storage wasn't needed.
Granted you are correct, however had they made a $199.99 and $299.99 model that offered lets say 64GB & 128GB SSD or even 160GB iPod Classic sized drive in it, it would have been a proper upgrade for ATV1 owners