Encoders do get better. Perhaps in a few months, when and if this conversion gets popular, folks will code better and more optimized encoders. In the last 6 months we have seen a lot better encode speeds on the same hardware out of H.264 stuff. Perhaps the 3.5 will go to 3 hours HA!
I don't think I want to take the "fool's" route right now. 3.5 or 13 hours seems like a long time.
If a "fool" has access to a bunch of systems, perhaps VisualHub and Xgrid might help.
Right now it seems that the conversion is rough. Does anyone know where we could download a small TS clip to play with?
Also, however long it takes to encode doesn't address whether or not the Apple TV will play those files, or play them well. Shoot, I'd be happy if an app could look at a video file and automatically set some kind of chapter points at each fade-out. Anything to make it easier to skip commercials on the first viewing would be a great help.