I love these arguments. It always comes down to American's obsession with mirror imaging onto others...
1. If you are videophile, you will never be happy with the current ATV. Until it can do 1080p, 7.1 yada yada yada...it will seem like a waste of money to you. Thats fine. For YOUR uses that is the correct choice.
2. For the casual user, ATV fits the fill almost perfectly. The casual user has HDTV's less than 45" (if even that). Therefore, 1080p is basically meaningless to them. Casual users do not care about 7.1, 5.1 or any kind of surround sound. Surround sound is a waste of lots of money for small benefits (as well as tons of hassle) that most people don't want to bother with. Casual users like convenience. ATV offers a convenient way to watch content. There are no physical discs for moms to hassle with. Kids can't scratch files. Mom doesn't have to worry about losing all that wall or closet space to 100's of dvd's and cd's that no one uses anymore. Mom and Dad are NOT about to buy extra drives and mess around with Handbrake ripping DVD's.
I can understand both points of view. Both are correct for THEIR specific wants and circumstances.
...so lets stop this stupid meaningless battle already...
Your conclusion makes some sense, but a lot of components of your argument do not.
If someone is a "casual user", then DVD (and by extension handbrake rips) -or- SD iTunes downloads which cost half as much as the HD downloads are good enough. Again, why buy the iTunes downloads (in either SD or HD) when you can have the discs. And really, discs don't take up tons of space, just stick 'em in a box in your basement... Unless you have a one bedroom apartment, I just can't see this as a problem.
Who exactly, then, is seeking something better than SD but not the best HD resolution? Are there casual users for whom DVD isn't good enough but Blu-Ray is too good? Quite an odd "casual user". Especially since the OP is asking for more
HD content on iTunes. Why would a "casual user" even want HD in the first place?
If the "casual user" has an HDTV, he may not be a casual user. A "casual user" still has an analog TV, or has an HDTV with no HD source and watches analog broadcasts in stretchy-vision (tm) and complains about the picture being stretched.
Not to mention the "casual user" who either buys everying through the ATV (which wasn't even possible a few months ago) or also has a Mac or PC to which the ATV is synchronized. That actually sounds a lot more complex than just having a disc player into which you insert a disc.
I really find this hatred of Blu-Ray irrational and it's probably due to "I don't have it so therefore it is useless" syndrome. I can't understand how people could want MORE than SD/DVD but settle for something in-between like 720p HD iTunes, but don't want 1080p Blu-Ray... Quite an odd niche.
The whole '1080p is meaningless below 45"' argument is complete nonsense. Would you say 1920x1080 on a computer screen is meaningless below 30"? What about the 17" MacBook Pro? Who says 1080p is only useful above 45"? You? I have a 22" 1080p set I use in my den that makes a big difference over the 1680x1050 monitor it replaced (which itself is better than 1280x720 of a 720p display). Besides, 720p is pretty much a dead resolution that nobody supports. AppleTV/iTunes do because Apple skimped on the ATV hardware. Fox and ABC are the only networks who broadcast in 720p. Everybody else broadcasts in 1080i, all the other high-def delivery methods including Blu-Ray do 1080i/p. Not to mention, since the 720p sets are falling away and everybody is doing 1080 sets, 720p content looks like crap because it has to be upscaled which introduces artifacts. If you don't understand that your HDTV has a native resolution, and any content not in that resolution gets upscaled or downscaled, maybe you don't have an HDTV and the whole "I don't have it so..." comes into play...
Finally, if surround sound isn't important, why did Apple enable SPDIF output on the ATV and why do the movies have 5.1 sound? Once again the curious case of the in-between "casual user" who apparently likes surround sound in the form of DD 5.1 over SPDIF but doesn't want the better, newer variations available on Blu-Ray. Curious indeed.
This is all about justifying Apple's poor support of the latest technology and fetishising file-only distribution, not about getting the best product. If you want to do it, fine. I'm just going to point out that you don't get the best quality, you don't get a hard copy (so I hope you make frequent backups), and you can't move to the next best ripping format when it comes along.