To your points:

1.  Agreed, no one is expecting anything else from this.

2.  As a steam user, I have never run into the $10 AAA title.  Maybe 2 years old stuff is that way, but then only if it sucked to begin with.

3.  This is mostly correct, but that actually would support the idea that the Steam boxes will fail.  Most users don't want to buy a special box/pc to play games, they use what they already have.  So, why would they bother to buy a special box that is more complicated to learn and won't have all the same stuff as a regular PC?

4.  Steam is well established, but only with people outside the casual crowd.  Most casual gamers are more interested in IOS or Android apps.  Still free and very cheap.

Great points. I really think these "Steam machines" could be a disruptive force in the industry, especially for Sony and Microsoft. I think there are a good amount of console consumers out there that would begin to jump ship once they realize the games available on Steam perform and look better, and cost much less.

From what I could understand Valve isn't making any hardware themselves. Other partners are doing it.

The SteamOS is the big deal for me. Someone correct me if I'm wrong about this.

You know what's funny about #1 in the OP's post? Had, let's say Sega, come out with a console and said it was digital only, there would be no backlash. It's the very fact it was the follow-up to the 360 (and the same would happen to the PS3) that causes the backlash, since they were effectively removing a feature. This isn't a problem here because the feature never existed to begin with.

I consider Bioshock Infinite and Tomb Raider to be AAA titles at this point, both have been around the $10 range multiple times in the last couple months.

I personally love the fact they're just putting the OS out there - I love Big Picture mode on Steam (it runs very well and has a very refined Console look/feel), but it is kind of a pain having configuration windows pop up before the game loads, if they can take care of that I'd gladly partition my HDD and put Steam OS on one of them (on my laptop). Already have a 360 controller with wireless dongle.

The machines themselves are going to be a speciality item for a while, and I'm sure the price will be quite high. But the ability to build your own is pretty awesome.

I agree i think that Valve is way in over their heads with this one.

If they make a sub £100 streaming box so i can play the PC games in my lounge ill buy that for sure, mass market interest in a PC that can only be used for playing games with no first party exclusives practically zero, people will just upgrade there PC's/

Biggest issue I have with SteamMachines is that I already own a PC that can get the free OS. So there's literally no reason for me to purchase it.

That, and because all digital sucks.

Couldn't you technically still buy physical copies and just claim the Steam version using the retail CD/DVD product code? Works now, don't know why it wouldn't work with the Steam OS. Or something like that anyway, ah well.

I think they are 5-6 years late with this but it will be a success in the long run (not the steam machines cos they will be overpriced, but the 'platform').

You're thinking wrong. What other OS is on multiple hardware, digital only with their own store, android. Steam OS wants to do the same style but in PC. This is just advertising to reach more market. In a few years we will see multiplet Steam Machine at various prices, as we now see with android tablet.