It looks like you get the iPhone (or iPod touch) guts [+] without screen, battery, cameras and probably a lot less persistent storage (I’m guessing anything between 512MB and 2GB) in a bigger box (most of that space is probably used by the PSU, though). That might just give you a margin when you sell it for $100, but probably not a big one.
I don’t think it will be a hit but I do think it will be more successful than the predecessor.
[+] Gruber seems to have a source that tells him that Apple TV uses iOS and the processor is a A4.
They are positioning themselves better then say Microsoft is, simply by referring to it as TV something, which is familiar to most people and isn't regarded as a niche market.
Consider the Xbox360, it has a relativity competitive price, all the features the Apple TV has plus, and superior implementation of others (codec support for one), and I am not even mentioning the fact that you can play games on it. (and the networks currently supported on Xbox can be seen here - http://social.zune.net/tv)
The Xbox however, is marketed as a game console, not as a Netflix, Music Video streaming/renting/buying device, that leaves it in a corner that apple is currently free to dominate using their considerable marketing clout.
The form factor and name are unassuming and non threatening, it passes clear below geek radar, but grabs the imagination of the public, in this case even without any clear technical innovation.
The notion that Apple is just lousy at marketing set-top products and that's why this isn't a runaway success beggars belief. Did you see Steve Jobs just collect a huge round of applause for introducing buttons on an MP3 player? Because I just saw him collect a huge round of applause for introducing buttons on an MP3 player.
Look, criticism is fair game no matter what they do. Apple isn't entitled to have the set top industry move at a pace they set. I'm just saying, there's a million things Apple can do to improve Apple TV, but improving Apple TV isn't really the point of Apple TV.
Apple's strategy with TV seems to be to slow-roll it until they get to a place where they can execute a strategy that will dominate it. They can't do nothing, since that would enable competitors to dominate it. They can't revoke everyone's TV. So they launch a "hobby" product to maintain a certain level of uncertainty in the marketplace.
Criticizing the success of the Apple TV in light of that seems somewhat silly. They actually call it a hobby. I assume they're doing the minimum with it that they can actually get away with; any dollar they spend over that minimum is a dollar that isn't going to total domination of mobile computing.