I think exindguy is almost on the money. There are a couple issues I have with what he's said. First, the AppleTV is already cheaper than the Wii for it's lowest model and has a faster processor, more gpu ram, and a HDD built in. It should easily compete with the Wii in terms of game-quality, it simply seems the AppleTV lacks certain functions to make it a full gaming device.
Ergo, a second-gen system wouldn't need to be significantly more powerful to becomes semi-competitve in the game market. This is a likely path for Apple because it doesn't mean any significant risk yet the potential rewards are tremendous. While they expected to sell 1.5 million AppleTVs for the first gen, the addition of gaming features could boost the 2nd gen hardware sales much further, and it'd also increase the volume of content sales. Plus, by not drastically improving hardware there will be a great deal of compatability between each of Apple's devces.
This may, however, require a second generation of the Apple Remote. Something that has added functionality but doesn't compromise the simplicity. Though I may be wrong, and it may be capable of handling controls for games like Madden. If it does in some fashion, they'd be content getting in on the PS2/PSP/Wii pool of games (and gamers) while still beating MS and Sony to the punch on having the all-in-one box (and at an affordable price).
I think it'd be a bit foolish to compete head-on with MS and Sony on the game side of things. That has led to the high prices and sluggish sales for both companies, and it has also distracted them from getting the rest of their content up to snuff. Basically, they'd be cutting both of those systems off from tapping into the "120 million PS2 owners" often mentioned, as well, since many of the people who bought it did so because it was cheap and offered them access to a large amount of entertainment.
Apple could attempt to compete with MS and Sony in terms of power. They certainly have the money. But the industry is already proving that those two companies have begun heading in the wrong direction, as the Wii frequently outsells both combined. Many people don't want to pay a lot more for slightly prettier graphics, and both companies have essentially failed in regards to being all-in-one content providers. Furthermore, even when they begin to match AppleTV's price they still won't have the depth of content a competitive infrastructure. If those two companies really were competing for the livingroom they would essentially get suckerpunched if and "AppleTV+Game" launched at a lower price and gaming content the mainstream gamer will find enjoyable.
Basically, they'd remove the complexities of gaming, as the Wii has, provide the same (type of) content the massively popular PS2 offered, they'd make the games cheaper overall, and they'd have the advantage of their product being seen as an all-in-one from the start. Most people see Xbox or PlayStation and they only think games. A lot of those people wouldn't buy either if they thought otherwise, because they don't think it's worth another $100 (+live) or another $150 for gaming features they didn't even ask for. But that won't stop them from buying the occasional game from the iTunes store.
I've never owned an Apple product in my life, but I sure do wish I owned Apple stock. They already have a business model that is quite lucrative if they only sell a couple million pieces of hardware, I can only imagine if they "failed" their way to 10 or 15 million.
You do not have the right to never be offended.
