AppleTV is a hobby because as you mentioned they can't truly distinguish themselves with hardware and the software is already the best by far but what will make AppleTV skyrocket is more content which they are at the mercy of the providers at.

Unlike other products that launch... AppleTV is slowly over the years adding more and more channels. For most of us, we only watch a set number of shows so once those shows are on AppleTV we no longer will need CableTV.

If they launched a Tivo competitor Tivo would be blown out of the water, but Apple doesn't want to simply be better than the competition they want to reinvent the model. I for one will be very happy the day I can get rid of my tivo and use AppleTV for all things tv but think they day is still a ways off.