Whenever I think of the AppleTV, I squeeze my eyes shut, click my heels three times, and say, “There’s no place like home. There’s no place like home. There’s no place like home.”

Where I go in my mind’s eye is the living room. I’m laying on the sofa watching television or a movie on a modest but impressive 42-inch plasma display. At the heart of my home theater, the device running the whole operation, is the AppleTV. I download from the Internet the TV shows or movies I buy, rent, or request on demand in high-definition. I record one show while watching another. I watch Internet TV programs on “stations” like Joost, YouTube, or MySpace.

Then I wake up. This is no Oz.

The elegantly designed, low-profile AppleTV sits unobtrusively next to my Samsung display. To the right of it is the incredibly ugly, obtrusive set-top box given to me by my service provider, Verizon. Right now, I need both devices — and the DVD player in the cabinet below.

I wish I needed only one. The reality — my Kansas — is that Generation One of the AppleTV falls short of meeting my needs and expectations and those of many other home entertainment enthusiasts. We still need all these devices in our living rooms, or we plunge down the rabbit hole of buying media servers or building our own. To me, the AppleTV is wonderfully simple to use but deliberately crippled, underperforms, and overall is a disappointment, all things considered.

And yet it drips with potential and promise. This is what interests me. I believe that Apple — the company that brought us the iPod, iTunes, the iTunes Music Store, and the iPhone, not the company that gave us Lisa or the Newton — has a plan and roadmap for AppleTV. What we are seeing here is Generation One, just like there was an initial release of the iPod, which led to the iPod and iTunes for Windows computers, to color displays, photographs, video, and some might argue the iPhone.

Where will AppleTV go next?

But first, Generation One.

Out of the Box

One of the things that attracted me to the AppleTV was the promise of ease of setup, ease of use, and convenience. I had been researching Windows Media Center computers, buying an off-brand media center, or building my own by using an old laptop or a Mac Mini. Ultimately, I decided I just didn’t want to mess with the hassle of buying and setting up a Media Center computer or building my own. I just don’t have the time (or money).

Another consideration was important. I am not the only one who uses the home entertainment equipment in the living room. My wife and kid control the clicker, and unless the user experience for the DIY media center was butt simple they’d never use it or would complain until my ears bled.

We already purchase TV shows from the iTMS that we missed recording on the DVR, and I previously had bought season passes for “Bones,” “Eureka”, and “Psych” when I got sucked into the whole video-on-the-iPod-thing. I’d transfer these to the iPod and hook it up to the TV to watch on the larger screen.

So it made sense to try the $299 AppleTV. As promised, the AppleTV was amazingly simple to hook up to my television and network. I provided the network security information as requested, fired up iTunes, and began transferring or streaming content within 15 minutes without reading the instructions. It does, however, take a while to move gigabytes of data over a wireless network (I use both an 802.11g and n network).

Do note as well that you will need the right kind of television — either an HDTV or a fairly-new standard television that uses Component video cables. Also, you will need to purchase, or have on hand, the needed cables to hook up the AppleTV to your set. (See Macworld’s AppleTV coverage for assistance.)

Months of Use

After months of use I am reasonably satisfied with what the AppleTV delivers, but I am probably more forgiving than most home entertainment aficionados. A few observations:

Ease of use: stunningly simple. The AppleTV’s main interface is clutter-free: You have a choice of Movies, TV Shows, YouTube (new to version 1.1), Music, Podcasts, Settings, and Sources. As I had hoped would happen, my wife and kid use the AppleTV without pestering me with questions and criticisms, although I am the one who manages the content.

Quality: for me, acceptable; for you, I’m not so sure. One of the biggest issues of the AppleTV is it’s capable of playing HD content, there’s just little of it on the iTMS. This is a deal-breaker for many who want to buy an AppleTV but won’t because the quality isn’t up to their HD standards.

Even so, I was surprised by the overall quality of the AppleTV. The shows I downloaded from the iTMS were a bit fuzzy, especially the ones encoded at 320 by 240 before Apple began encoding content at 640 by 480. But after spending years with a standard television I didn’t care that the show quality was not high-definition. I’ll watch HD on the HD channels and near HD quality on an up-converted DVD player. For now.

Additionally, the TV shows and movies I ripped and prepared for the AppleTV were surprisingly good, even though there was some loss of quality during the encoding process. The only content of questionable, borderline unwatchable quality for me were TV shows and movies I downloaded from the Internet and YouTube.

YouTube: Speaking of YouTube, I find Apple’s inclusion of it profoundly important, depending on what the company does with it. For the first time, non-network, non-commercial content is delivered into my living room. The quality is much like YouTube itself: most of the content is decent, although not spectacular. I expect this will improve over time.

Photography: One AppleTV feature that’s a big hit with me, and many others, is the photo capabilities. I created a Photo Album in iPhoto for all the images I wanted displayed on the AppleTV — I don’t want to eat up precious had drive space with 10,000 photos, when 500 will do. I select Photos from the main interface and all of the images are displayed in the slideshow format I designate.

Older TVs: Many people have older TVs and cannot use an AppleTV. This sucks. But I believe Apple put a stake in the ground and is out front on this issue. Most TVs being sold are digital now, and television itself is expected to go to digital broadcasting in 2009. So why should Apple look backward?

Not much HD content: Yes, agreed. But I cannot believe that Apple would introduce the Apple TV without high-definition content in mind. If not, the AppleTV flops.

No downloading of content: This is another annoying non-feature of the AppleTV. For now, I cannot download the movie of the trailer I am watching from the iTMS. I cannot download directly to the AppleTV the most recent episode of “Lost” without going through iTunes on my computer. I’m certain that this is a complex process, involving many components, and over time it will be solved and made available to consumers.

No downloading of rentals: Add this to the annoying non-feature list as well. While many people buy and collect DVDs, just as many if not more rent TV shows and movies from services such as Netflix. It’s been long rumored that the iTMS will eventually offer movie rentals once, I suspect, when the support systems are in place and functioning.

No DVR capabilities: This is a tricky one as Apple would face a slew of DRM issues, not to mention wrath of the studios. Add dual tuner capabilities (allowing you to watch one show while recording another) and AppleTV could be the big winner. Smaller companies are nibbling around the edges of this, but no major player has taken the step fully. Sony is rumored to be thinking about adding such capability to the PlayStation 3.

Encoding: Third-party software exists that allows you to rip the TV shows and movies you own on DVD to formats compatible with the AppleTV, but these are time consuming to use and manage. It would make life so much easier if we could just download the most popular shows and movies we watch from iTunes and the Internet.

Generation Two

So we’re back to the original question: What’s next? It’s been long rumored that Apple will take care of some, if not all, of the above issues. But no one except for Steve Jobs and his Apple Gang can really answer this, although there are a few clues out there:

The Apple home: Apple has dropped “Computer” from its name. Not only does it manufacturer Mac desktop and laptop computers, but it also gains more than 50 percent of its revenue now from iPods and iPod accessories, and this does not include AppleTV or the iPhone. Apple now has a variety of well-designed products positioned in homes to truly deliver the digital lifestyle in a coordinated, systematic manner.

Google influence: Adding Google’s YouTube to the AppleTV and the iPhone is just a start. Google CEO Eric Schmidt and Google advisor Al Gore are on Apple’s board of directors. There’s a history of collaboration between the two companies. What are they working on now? Can Google help store, deliver, and provide the tools such as search for downloadable video into the living room?

Are the numbers soft on purpose? Many Apple fans are concerned that the AppleTV has been overshadowed by the introduction of the iPhone and that Jobs once referred to the AppleTV as a “hobby.” There’s little doubt that the speculated numbers of units sold — ranging between 200,000 and 300,000 — seems soft and unimpressive.

But I get the feeling that Apple has not unleashed the full potential of the AppleTV because its ecosystem, like the one developed for the iPod, isn’t fully in place.