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Ever since the Apple TV’s specifications were first announced, one criticism has come through loud and clear from just about everyone—the hard disk drive included in the device is too small. Apple’s finally responded to that problem by offering a 160GB drive model, which you can buy for $399, or $100 more than the cost of the 40GB version.

The news of the 160GB drive model came in conjunction with another announcement—Apple’s plan to release an Apple TV software update in June that will add support for Internet video from the popular YouTube service, re-encoded using the H.264 video codec that Apple has promoted quite consistently since its introduction in QuickTime 7. Because of YouTube’s popularity, it’s likely that news of the bigger hard drive got overshadowed—but adding a model with more hard-drive space is a pretty big deal.

A 160GB drive means that users with large music or video collections on their Macs no longer have to stream the contents to the Apple TV—it can be stored locally on the Apple TV’s hard drive instead. That’s terrific for me. Already my iTunes library is considerably larger than my 30GB iPod. And while I’ve upgraded my wireless network to 802.11n using a new AirPort Extreme Base Station, I’d still rather view and listen to that content on my entertainment system without having to worry if my Mac is turned on. It’s one less barrier to entry.

Steve Jobs provided some interesting context for the Apple TV during his interview with the Wall Street Journal’s Walt Mossberg at this week’s D: All Things Digital conference in Carlsbad, Calif. He described the Apple TV as “a DVD player for the Internet.”

That’s an incredibly appealing idea: A plain box that lets you watch video you’ve gotten through the Internet and is easy to use with a simple, push-button remote. It was enough to make billions for Pacific Rim electronics manufacturers when DVDs started to catch on. Is it enough to work as a hit “post-PC device,” though?

That “DVD player for the Internet” slogan gives you some sense of what Apple may hope to achieve with the Apple TV, as well. I think it’s unlikely that Apple will simplify the process for ripping and converting movies to be viewed on the Apple TV. Instead, it seems more likely that the company will continue to allow this segment of the market to be served by third-party software developers. Already companies like Elgato, with its EyeTV software, and Roxio, with its new Crunch software, are releasing products that simplify this effort.

But the YouTube announcement offers another key insight into Apple’s ultimate hopes for the Apple TV. As a DVD player for the Internet, it’s a home-run for the Apple TV to support YouTube directly. Some may scoff at the potential banality of this announcement—after all, do you really need to see a cat playing the piano on your wide-screen HDTV? But there’s little question that YouTube is enormously popular. And with Apple working closely with Google, other companies may line up to open their video content to the Apple TV as well.

Perhaps just as telling is Jobs’ insistence to Mossberg that, for now, at least, the Apple TV is a “hobby” for Apple as opposed to a real business like the Mac, the iPod, and soon, the iPhone. Jobs is understandably cautious. After all, the concept of a media center PC is nothing new, nor is the idea of connecting a computer to a home entertainment system using a bridging peripheral like a Slingbox. The water gets further muddled when you recognize that some users want to push content in the other direction, as well—from a DVR to a computer, for example. That brings with it its own set of headaches, such as copyright issues.

It’s these sorts of things that have made this a very difficult niche market just to define, let alone create. While some companies are making some money, there isn’t a killer app for it yet, Apple TV notwithstanding, and no one has made a killing. Until it proves itself with a bona fide hit, Apple is unlikely to invest a huge amount of energy in making it work. So instead, the company has taken a more measured approach, to see if making a DVD player for the Internet is something that customers want.

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