Shane, if you're already using MCE, frankly you're not the target audience for aTV. And there already is a video_ts solution for Front Row, with a big thread here about it.
Apple really needs to get up to speed on what folks want as far as file flexibility in their home theater front-end jukeboxing.
Now you're starting to sound like Ryan. Apple doesn't really need "to do" anything: it's profitable, selling powerful stylish computers for a fair price, especially at the low end, it didn't need to put 3.5" drives in the mini, it didn't need a do-it-all STB DVR with multiple TV tuners, it didn't need a "maxi mini" with HDMI and cableCARD, it's quite happy to be just where it is, with all sorts of new goodies rolling out very soon, Leopard, iLife '07, a Boot Camp improvement, Time machine, a new iteration of Front Row, etc.
What makes you think that Apple even cares about file flexibility? Apple offers its users a supportive, but controlled end to end experience. Again, their customer base couldn't care less about the subtleties of "front-end jukeboxing" and wouldn't know where to start. It also knows Windows, MCE and Vista aren't going to keep people from switching to Macs with Leopard, unless they're already pre-disposed not to. (And within that group "home theater issues" is a minute subset.)
We're NOT going to get all our content from iTunes
A whole lot of people will, though, enough for Apple to make even more money, sell even more hardware and open even more stores, and Apple knows there already are plenty of free options for taking the content you do already have and making it conform.
Whether that's actually worth it now while we wait for 720p content from iTMS, is a whole other question.
But Apple is saying in no uncertain terms: conform, or find your own solutions, but don't complain.
Seems reasonable to me.