I've been reading a lot of speculation recently about what a future Apple TV might look like. Not nearly enough of these analyses have talked about AirPlay. It's clear to me that AirPlay would be so important to the Apple TV, you might as well call it AirPlay TV.
There's so much compelling video content and games available on the App Store, it's not really that big of a deal if you can't watch cable TV, DVDs, or play Xbox on the Apple TV. This trend is only accelerating. When Steve Jobs said "I finally cracked it", I'd bet he was thinking of how AirPlay and the App Store had eliminated the need to support old set-top boxes.
The new AirPlay Mirroring feature in iOS 5 doesn't get talked about much, but it's the key to making this work. Watch this demo of AirPlay Mirroring if you need to be convinced. AirPlay Mirroring with the current Apple TV is underwhelming because of the hassle of making it work. You need to find the TV remote, switch to the Apple TV input, find the Apple TV remote, wake up the Apple TV, then go back to your iOS device and turn on AirPlay. Ugh! Apple has to make AirPlay work effortlessly, and to do that, they need more than a set-top box. They need to control the whole TV.
The one big technical hurdle for Apple to overcome is the unreliable WiFi connection between your iOS device and the TV. There are a number of ways they could overcome this. They could put a WiFi router or extender in the TV to ensure a fast connection. They might try another high-bandwidth wireless networking standard that doesn't rely on flaky home WiFi routers. They might come up with a new split architecture in which apps run partially on the TV and partially on the iOS device. I don't know exactly how they'll solve this, but I am sure they will solve it.
Once the networking is reliable, the user experience can get really good. There would be no on/off switch on the TV. You'd just sit down on the couch, pick up your iPad (or iPhone or iPod touch), start using an app, and the TV would turn itself on and start displaying the AirPlay stream. No fumbling with remotes. No numeric keypads and up/down/left/right buttons. Just touch, swipe, and speak to find what you want to watch. You'll never plug a set-top box into this thing, and you'll never want to.
It's possible Apple could choose to just license AirPlay to TV manufacturers, but something tells me they won't be able to resist making a showcase TV that screams "Apple!" to everyone who walks into your living room. Once Apple announces this, iOS developers will be scrambling to support AirPlay. I'm sure Apple will give enough advance notice to ensure that a ton of amazing content is available on launch day. It will take a while for Apple to get all of the big TV/movie studios, sports leagues, and news networks on board, but they will eventually. Most them already have dipped their toe into the App Store waters (see HBO Go, MLB.tv, and CNN, for example).
If I were an iOS developer, I'd start investing in AirPlay right now.