New:Steve Jobs announces Apple TV 2.0 at Macworld

What Will Apple TV 2.0 Look Like?

The biggest criticism leveled at Apple TV in its early reviews is that it's too limited. It's not a full DVR device, so it doesn't compete directly against the TiVo. It doesn't play games, so it doesn't compete directly with the Xbox360's media-centric feature set. On the other hand, if you're looking for a device that seamlessly connects to the internet to play movies and primetime television shows, it's the only bet in town.

How will it improve in the next version?

A Larger Hard Drive: Of Course

The current drive only holds 40 gig, which is smaller than some iPods. Like the 5 gig first generation iPod, there's no doubt they will increase the capacity in later versions. Storage is cheap, so Apple could easily ship the next Apple TV with a 80 gig hard drive without increasing the price.

DVR Functionality: Don't Count On It

The initial comparisons to TiVo were inevitable, but Apple doesn't appear too keen on supporting traditional cable. Expect them to do an end-run to create their own pay-per-view or on-demand internet channel. Apple is looking to compete against the cable companies, not piggyback on them.

Subscription Content: "One Never Knows"

A shareholder recently asked Steve Jobs if Apple was planning on adding the aforementioned subscription service to Apple TV. According to press reports, Jobs grinned and said "one never knows". This is the strongest signal yet that Apple is planning on releasing a subscription service soon; they have long claimed that they cannot comment on upcoming products. This semi-response in regards to a rumor is unprecedented.

Software Updates: Confirmed

During a recent earnings call, Apple stressed that the Apple TV will be accounted as a "subscription service", meaning they will not need to report sales numbers for two years. As an explanation, their CFO stressed Apple will be continually upgrading the Apple TV via software. Whether or not this means the Apple TV will add a subscription product, software updates are coming.

Conclusion

The Apple TV 2.0 will have a bigger hard drive and perhaps a slightly modified industrial design to set it apart. But the lion's share of the changes will occur in the software itself, not in the hardware. This is reminiscent of the iPhone approach: by shipping a cell phone with no buttons, Apple can do almost all the upgrades they want with simple software updates.

Everything except larger hard drives.