On Jan 7, 2007 Steve Jobs unveiled to salivating Apple zealots at Macworld, 2 new revolutionary products. One was some kind of new “smartphone,” and the other was AppleTV. One would change the technology world… this is about the other one.

Okay, I’ll admit it – I really wanted AppleTV when it was announced and obviously wanted the iPhone too. But, come launch-day the iPhone was the one I waited in line for because AppleTV just didn’t seem ready yet. And that’s the way it went for many people – the launch came and went, but they waited.

A year later ‘Take 2′ added iTunes purchases and rentals directly from the comfort of your couch, and in late 2009 the price dropped to $229 for the 160GB model. That pushed me and many other Apple loyalists over the edge, but we certainly weren’t in the majority yet. Steve Jobs’ hobby still hadn’t quite hit that sweet spot of function and price. Until now.

At $99, AppleTV Take 3 (that’s what I’m calling it but for editorial reasons we’ll refer to it as The New AppleTV), now competes directly with similarly priced dedicated set-tops like Roku. In addition to slashing the price more than in half, the other new marquee feature is Netflix (finally!). Oh yeah, and they removed all the analog outs…and the internal hard drive… you don’t care about those right? Wait. It has NO HARD DRIVE! (Other than 8GB of flash).

It’s not the first time Apple as taken the bold move of scaling hardware back to make it better by actually removing(!) features. Seen the new iPod Nano? You really didn’t like shooting videos or even watching videos on your iPod, did you? Of course not.

Okay so how does AppleTV work now that they’ve scraped the guts out of it and turned it into that cute little hockey-puck? Actually it works pretty great!

Setting it up is dead simple once you get it out of the impossibly small package, just be careful. Only surprise for me was while sliding open the typically minimalist Apple packaging, I didn’t realize the tray was upside down. All of the elegant plastic-wrapped Apple goodness spilled out onto my table and carpet. Oops. Good thing there’s no hard drive in there!

Power in, HDMI to the TV and it’s on. For the AppleTV nostalgic, no glorious animated splash greets you as it boots up, but at least startup is pretty instantaneous. Hit English if that’s your preference, pick a wifi router and enjoy the alphabet-wide sideways-scrolling fun of entering your password. If you have an iPhone, iPod Touch or iPad handy you’ll want to grab Apple’s free and newly updated Remote app. Once paired, you can enter your iTunes info and everything else a whole lot easier than reliving those memories of inputting arcade high-score initials.

How does it work?

The thing a lot of people will buy the $99 AppleTV for is Netflix (since that’s a popular price-point for standalone Netflix streamers) so let’s start with that. There it is under the Internet tab front and center. If you’re already familiar with watching stuff on AppleTV, Netflix is really no surprise. It navigates and responds exactly the same as everything else. It’s what everyone has been expecting Netflix to look like on AppleTV. But comparing it to other Netflix streamers like Roku and the Wii Netflix app, navigation on AppleTV feels a little forced.

On AppleTV movie images fly past you on the left and you pick from the text list on the right. Pretty, but not really as functional as Netflix on Roku. In my opinion AppleTV could lose that menu level entirely and go straight to the movie icon board. But right now, you click a list heading, then you get to the poster icons. From there navigation is similar to the Roku but you need to click through to each movie for the info and description.

I’ve always thought having a screen full of movie posters organized by text category headings was very couch-friendly. RokuHD immediately fills your TV screen with a huge movie icon board where you scroll up and down moving section by section, (Instant Queue to Suggestions, to New Arrivals, etc.) and left and right through the movies and shows. Also, Roku has a nifty pop-up description and ratings suggestion based on stuff you’ve liked in the past. That info is one more click deep on AppleTV.

Streaming picture and audio quality
We compared the New AppleTV to a RokuHD using the pilot episode of Arrested Development streaming from Netflix, and then compared it to it’s older (non-Netflix) AppleTV brother viewing the pilot episode of Raising Hope free on iTunes from Fox. Viewing was on a 55-inch 1080p LCD TV. Screen shots are actual images but for illustration only – opinion is based upon actual viewing.

For picture quality, the New AppleTV is almost indistinguishable from the old. The interface on the Old AppleTV is a little snappier for accessing stored content since it’s available right on the internal hard drive rather than streamed across your network. Everything is 720p but it’s a beautiful 720p. iTunes HD titles look amazing, rivaling Verizon FiOSTV in nearly every way. Compression artifacts are non-existent and complex images and action scenes render just fine. Compression is a little heavier on Netflix titles but somehow AppleTV gets a smoother picture even compared to the 720p on RokuHD. At the time of this writing, the new 1080p Roku models were not available for review. I did notice a few dropped frames on one title but was unable to determine if these were caused by AppleTV or a connection problem.

Sound quality basically matched picture quality in testing since Netflix content only streams in stereo currently. iTunes HD includes 5.1 surround and the difference is noticeable if you have the equipment.

Picture and sound quality ranking:
1. New AppleTV (tied with Old AppleTV) playing iTunes HD
2. New AppleTV playing Netflix
3. RokuHD Netflix

Interface differences – New AppleTV / Old AppleTV
Those familiar with the older menu system will notice more similarities than differences, mostly very subtle. Movie/TV Show poster icons are sized a little bigger but one big difference is that TV Shows listing on the New AppleTV has a ‘Free Episodes’ section whereas the Old AppleTV does not. Obviously the two are pulling listings in different ways since the Top Shows and Episodes are slightly different.

For whatever reason, only the new AppleTV gives you the dedicated section to easily find free TV episodes. Other than that most of the navigation is the same. The New AppleTV drops top-menu sections Music, Photos, Podcasts – which now fall under the new ‘Computers’ menu.

Getting computers to appear under that menu in order to stream from them wasn’t as easy to setup initially. I had ‘Home Sharing’ already enabled on both an iMac and MacBook Pro but entering the iTunes account info and password on the AppleTV didn’t immediately connect them. Only after turning Home Sharing off, then back on again did the computers appear on the AppleTV menu.

In addition to streaming movies and music to the TV entertainment system, Home Sharing allows you to navigate the connected computer and browse photos and play slideshows. The Old AppleTV already had one of the best photo slideshows around and the New AppleTV goes one better by adding Origami, Reflections, and Snapshot slideshow themes which match those in iPhoto. Playback is smooth as glass and pictures are rendered in great high definition resolution to look great on TV.

Home Sharing also is required to use an iPad or other iOS device with Apple’s Remote app to control AppleTV. While the New AppleTV uses Home Sharing, the old one still uses the two-way numeric passkey. Once it’s all setup things are pretty seamless and navigating AppleTV from the iPad is very similar to the regular iPod app. Artists, Playlists, Genres, Podcasts can all be navigated directly from the iOS device which is helpful if you don’t feel like browsing through the menu on your TV or if you’re in another room. It can get a little confusing though now that you’re remote controlling content that’s shared from a computer on your network, onto the AppleTV, and then navigated on an iOS screen… especially when you can remote control that same iTunes library directly from the same app.

The iPad makes a fantastic control surface for AppleTV. This is where the whole iTunes ecosystem shines. Sit back and forget about where the remote is pointed since you no longer rely on IR signals. Controlling everything from anywhere in your home is as easy as operating the iPod app. Plus, with the new AirPlay streaming you can send media from an iOS device to wherever your AppleTV is attached. Fully integrated home theater systems like this were only a dream (or several thousand dollars) a few years ago.

At the time of this writing, AirPlay streaming is not fully implemented even on iPad’s iOS 4.2 beta 2. The button is there to the right of the playback control pop-up, and tapping it gives the choice for iPad or AppleTV but selecting AppleTV doesn’t yet stream the content.

Once that feature is live it will be a real game-changer. Many apps, and not just those from Apple, already have the AirPlay button. The possibilities seem pretty awesome if you consider AppleTV running iOS apps. Possibilities nobody has even considered until now. We’ll have interactive apps that leverage an iDevice that you hold to control or manipulate something on a TV screen, (read: games!) but why stop there?

All we need now is an App Store. Or Jailbreak.

The New AppleTV hits many of the old sticking points – lower price, smaller size, Netflix, tighter integration across iDevices. Killing the hard drive seems crazy but at least you no longer have to be concerned with ‘filling it up’ and needing to hack it to upgrade the storage! The downside to that is the new AppleTV doesn’t do much without an internet connection (actually, nothing) but if you don’t have an internet connection these days you aren’t reading this review. And if you have all your content on your computer already, why do you need to sync it to a device connected to the TV? I never really understood that part of the original AppleTV. Why not just stream everything?

Leaving that old fashioned hard drive behind and moving to the Apple A4 processor definitely allows the new version to run much cooler and use less energy if that’s important to you. As for how it compares to other set-top devices like Roku, there may be a place to compare it with similarly priced 1080p offerings but the people who really care about 1080p are watching Blu-Ray.

Will GoogleTV kick AppleTV to the curb? Or will it offer yet another box to find room for in your TV cabinet? No matter what, it’s unlikely Google has struck a deal with Apple to stream iTunes purchased content so as long as you are set on that, you’ll always have a spot in your home theater for AppleTV.

AppleTV is all about simplicity, elegance, and integration with the iTunes ecosystem. For these reasons, we think Apple is going to sell an awful lot of AppleTVs!

Review by Larry Wiezycki. Larry works in TV and media production as part of an Investigative Team for a consumer advocacy law firm, James-Hoyer. He’s received 4 Emmy awards and has been an avid iOS and OS X user for years.