There are several things which I suspect are driving the decisions of Apple's lead team which I don't think are being fully appreciated...
1) The Apple TV earns Apple additional revenue after the initial sale. Sure, there will be people who buy one just for Netflix, or just to stream their own content, or just to use to play back their iPhone videos/photos, but I'm guessing that the vast majority of folks will at least dabble in renting a TV show or movie here or there. Others will do quite a bit of this. And that's all gravy for them (or, if they're taking a loss, each sale brings it back towards profitability).
2) The more of these they sell, the better the deals they'll be able to negotiate with movie studios and networks. They know they're stuck with a chicken and egg syndrome right now, and they could be willing to "lose some money" today by taking a gamble and hoping that they'll get one of these in every iPhone/iPod Touch/iPad users' home. I believe I mentioned this previously in this thread, but they've supposedly sold 120 million iOS devices (note: that number probably counted devices sold to stores and not to actual consumers, but between the time he made this statement and now, they probably have hit 120 million devices actually in end users' hands). Think about that number for a second. If they even sell an Apple TV to a fraction of those users, they'll gain *significant* leverage with the movie studios and networks. A large number of users will equate to a significant immediate profit from movie and TV show rentals, but it will also result in them getting more networks on-board, and negotiating more day-and-date releases and better rental pricing...which will then result in even more end users renting movies/shows...which means more profit and more leverage for them.
3) Aside from them having money to burn and the hope of earning yet more money via rentals, another reason they might take a risk and spend (lose) some money initially is because of competition nipping at their heels. My apologies to the wonderful team at Boxee, but Apple isn't concerned about them. Or Netgear and their impressive upcoming box. What they should be concerned about is Google. Not because their upcoming product is much of a threat (it isn't by my estimation), but because it's Google. They're huge. They were recently on Apple's board (so they know what Apple's R&D was up to and seem to have taken in a keen interest in going after all the same markets - phones, mobile OS, and now TV). If Apple's team treated the aTV too much like a "hobby" they'd risk Google coming in and eating their lunch. So that might mean they'll be more willing to take a risk, take a loss on devices sold, etc. They've still got the leading smartphone out there, but they'd be foolish to rest on their laurels. They have to expand into new markets, and sometimes that means taking some calculated risks.
4) As I alluded to above, this device may be viewed by Apple as an iPhone/iPod Touch/iPad "accessory." Personally I think the Apple TV has more appeal to the non-geeks out there than the Boxee or Google TV. Hopefully Apple will spend a few bucks advertising this on TV (I'll be shocked if I see D-Link spend money on TV advertising for Boxee), so your mother might actually hear about the Apple TV and think about buying one. But there's also a big reason why Apple would want folks who already own an Apple product to buy one, even if they don't make much/any money on it: It helps to *keep* them a part of the ecosystem. Let's face it, when an iPhone users' AT&T contract gets close to coming up, they start looking at the competition. But if you've got a ton of apps you've bought (or even downloaded for free) or you've got several iPhone accessories (of which the Apple TV is one), you'll need to see something *really* appealing in the competition's product to get you to switch, because you've now got more to lose. Apple wants you to stay a part of their ecosystem (and, in fact, to get more entrenched in it), because it means the possibility that you'll buy more apps (of which they get a cut), buy more iTunes music, buy more movie and TV show rentals, buy more Apple TV products. And your existence in their ecosystem gives them more leverage in the market.
Anyways, this is how I imagine the minds at Apple thinking. I could be way off base. And I suppose that none of this has much bearing on how much RAM/storage the upcoming Apple TV will have, except to say that I don't think Apple will skimp on it just to save $10 (so as to increase profits by $10). If they skimp on it, it's because they think they're giving it "enough", even if it turns out later that they thought wrong and it wasn't really enough. I will say, though, that I don't expect problems with streaming TV shows and movies with this. I'd love to see this thing have plentiful RAM/storage so that it can be upgraded to support an app store later, but even if that's not on their radar, I'd be shocked if they haven't taken a "lowest common denominator" approach in their testing and ensured that this will work well for people with *relatively* slow broadband connections. Perhaps that might mean that they've tweaked some things to auto-adjust the quality/bitrate/resolution (a la Netflix) and deliver a lower bitrate when the user's connection isn't up to snuff. I'll be pretty shocked, though, if I start hearing from people with DSL or relatively slow cable modems that they're having buffering/stuttering issues with this box. Anything's possible, and I don't think they're perfect, but I just don't see it, since they already have a track record of catering to the average person who wants something to "just work".