Is the Apple TV officially a flop? (Or: How to fix Apple TV)

It's been online for a few days now, but I just spotted (via PaidContent) Forbes' article titled The iFlop (subhead: "Steve Jobs tried to design--and dictate--the future of television. Here's how he failed.") Author Scott Woolley calls the Apple TV "a flat-out" failure, claiming that it's sold less than 250,000 units in six months. Among the supposed sins of the product: the lack of a built-in DVR and a "parochial and proprietary approach" to online video content. He also highlights a variety of on-demand video competitors, including Vudu, TiVo (via Amazon Unbox), and Xbox 360 (which offers rentals and sales of TV shows via the Xbox Live Marketplace)--while glossing over many of their shortcomings. Still, is he right? Is the Apple TV dead in the water?

When I reviewed the Apple TV in March, I gave it a "very good," thanks mostly to its dead-simple setup and easy usability--traits rarely seen in the network media space. (The aforementioned Vudu box and Sling Media's Slingbox products are two notable exceptions.) But the positive slant was within the context of the Apple TV's purported mission statement: to deliver iTunes content to your TV. I assumed that frequent firmware updates would add additional features and functionality, but the only improvement so far has been the addition of YouTube videos. Nice, but not exactly a game changer. (The company also introduced a second model with a much larger, 160GB hard drive, for $100 more.)

So while Woolley's "iFlop" description is something of a hyperbole, the essence does ring true: the Apple TV doesn't have the "gotta have it" appeal of the iPod. In its current configuration, I certainly wouldn't spend money to buy one. What would it take to change that? I can think of quite a few suggestions:

• Better video quality: Movies and TV shows sold on the iTunes Store are optimized for the small screens of the iPod and iPhone. Blow them up on a big screen, and they look plain awful. Apple's trying to keep down the file sizes to minimize download time and maximize the memory capacity of its increasingly flash-based iPod line. Microsoft and Vudu are offering videos with far better quality (DVD to HD, often with surround sound). Apple needs to follow suit--especially considering that the Apple TV is designed to connect high-definition sets.
• On-screen iTunes Store access: As of this month, the iTunes Store is available directly through iPod Touch and iPhone models (albeit for music only). But Apple TV purchases still need to be done on a networked computer, then streamed to the unit. An on-screen version of the iTunes Store would be a much more convenient and intuitive experience. Until then, Vudu, Xbox, and TiVo have an edge.
• A rental option: TV shows for $2 isn't bad, but paying DVD prices for movies with sub-par video and audio quality is a tough sell. A rental program would be a nice alternative (again: Vudu, Xbox, and TiVo already offer this). Rumors of just such an offering have intensified over the past few weeks. An expanded version of Apple's Multi-Pass would be great for TV shows, as would the ability to rent a movie for a couple bucks. Of course, we'd really love a flat-fee Rhapsody/Netflix-style subscription--but don't keep your fingers crossed.
• Expanded file compatibility: Apple TV is pretty much limited to streaming what you can see or hear in iTunes, but plenty of people have other videos on their hard drive--DivX, XviD, AVI, WMV, and the like. Other digital media adapters have no trouble with these formats, and we're sure the Apple TV has the processing horsepower to handle them, too. Ideally, adding more robust file compatibility to the unit--and to iTunes--would be the best solution. At the very least, Apple should bundle a free version of QuickTime Pro, so you can more easily convert videos into an iTunes-friendly format.
• Internet radio support: This one sounds minor, but it's just another one of those little annoyances: Apple supports Internet radio within iTunes, but not on Apple TV. With such a wide variety of stations and formats available from all corners of the globe, having access to those streams in the living room would just be a nice little feather in the Apple TV's cap.

There are at least a dozen others I could add, of course, but I'm trying to keep the suggestions within the realm of reality: opening the box to third-party developers, adding an IPTV service, and (especially) turning the thing into a DVR just really isn't in the cards. Also, I wanted to focus on ones that Apple could theoretically add to the existing hardware via software, firmware, and infrastructure (iTunes Store) updates. Everything listed above sounds eminently doable--so here's hoping Apple does it.

What do you think? Are you satisfied with Apple TV as is? Do you have your own suggestions for improvement? Or should Apple just go for broke with Apple TV 2.0?