As a longtime Apple TV owner, I'll admit a dirty little secret: I really like the device. Sure, it has been one of the rare flops for Apple in recent years. And it could be so much more with say, a Blu-ray player or a web browser. But it is really good at its core functionality: bringing iTunes content into your living room. And that's why this new version of the Apple TV makes sense -- at least for now.
When I first bought the Apple TV, there were two varieties: a 40 gigabyte version and a 160 gigabyte version. I was torn between which one to get, but I ultimately went with the 160 GB one thinking I could put most of my movies on it. Big mistake. I basically never use the hard drive on my Apple TV, so it's a 160 GB hard drive sitting there doing nothing. Instead, I stream everything to the Apple TV.
In fact, the only time I do use the hard drive on my current Apple TV is when I rent a movie on it. Currently, even when renting, you download a movie to your hard drive where it sits for up to 30 days (or 24 hours after you start playing it). But with the new iTunes rentals (both TV and movies) everything is streamed -- no hard drive is required (besides a small one for buffering purposes). Thanks to that, and undoubtedly the knowledge that most owners were using it for streaming, Apple removed the hard drive from the device, and cut it down in size and price.