When Steve Jobs demoed the AppleTV’s new YouTube functionality at this week’s D: All Things Digital conference, host Walt Mossberg inevitably asked about picture quality, noting that YouTube content doesn’t always look that great on a PC let alone a big screen television. “The biggest thing that limits the quality is the source…”, replied Jobs. “You get what you get.” Or in the AppleTV’s case, you get what Jobs gives you.

Perhaps leveraging Apple’s ‘special’ relationship with Google (who acquired the video sharing site late last year, and whose CEO Eric Schmidt sits on Apple’s board), Steve Jobs has managed to get YouTube to re-encode their entire back catalogue using the higher quality — and AppleTV compatible — H.264 codec, rather than make do with Flash.

At yesterday’s D: All Things Digital conference Real announced a new version of their streaming video player ‘RealPlayer’, which aims to be like ‘TiVo’ for the web. The new version which will be out in Beta later in the month (PC only, with a Mac version to follow “later in the year”) will enable users to download or ‘record’ any video on a website where the content isn’t copy protected.

When a user visits a website with embedded video (Real, Flash, QuickTime or Windows Media), a floating tab appears giving them the option to download the file or ‘record’ it in the case of a live stream. Users can then burn the video onto a VideoCD or if they upgrade to the paid version (RealPlayer Plus) they can create a DVD. The legality of this new feature is bound to be tested once it’s released, as downloading and storing video from sites like YouTube may actually break their Terms of Service.

(All quotes in this post are either taken from Engadget’s excellent live-blogging coverage or the edited video published on the D: conference website).

“We’re in two businesses today, we’ll very shortly be in three, and a hobby”, Apple’s CEO Steve Jobs told Walt Mossberg in an on-stage interview at yesterday’s D: conference. The first two are computers and digital music (iPod/iTunes), and the third will be the cell phone market which Apple will enter next month with the launch of the iPhone. And the hobby? The company’s recently released set-top-box, the AppleTV.

“The reason I call it a hobby is a lot of people have tried and failed to make it a business. It’s a business that’s hundreds of thousands of units per year but it hasn’t crested to be millions of units per year, but I think if we improve things we can crack that.”

Later on in the Interview, Mossberg describes solving the problem of connecting the PC/Internet to the TV as a holy grail, and asked Jobs again why he referred to the AppleTV as a hobby. While admitting it was a purposely provocative statement, Jobs continued to play down the significance of the device, saying that for now we should think of it as the entree not the main course. “Coming from the PC market you first think about getting content from your PC to your living-room. I’m not sure that’s really what most consumers want”.

Jobs then went on to demonstrate the device’s new capability: watching YouTube videos streamed directly from the Internet. Perhaps a hint of what’s yet to come; the main course as it were. The company had lots of other ideas for the AppleTV, he said, including pulling in other content from the Internet. Although he all but ruled out adding a web browser to the device. “I think a normal web browser is not necessarily what people want in their living room”, he said.

In conceiving the AppleTV, Jobs said that for a long while the company wanted to produce a set-top-box, but didn’t want to have to deal with the Cable companies, and the different technical standards required to do so. It just didn’t make sense. Then he realized that there were a lot more DVD players in existence than traditional set-top-boxes.

“… we just want to be a new DVD player for the Internet age. And that’s what we can be. So our model for the Apple TV is like a DVD player for the Internet.”

We recently wrote about the plethora of unnoficial AppleTV hacks to have surfaced on the Internet, including a plug-in that brought YouTube access to Apple’s set-top-box. As of today that particular hacker can take a well earned rest (or move onto another cool project) because Apple will soon release an update which enables the device to browse, search, and playback YouTube content.

From the press release:

Beginning in mid-June, Apple TV will wirelessly stream videos directly from YouTube and play them on a user’s widescreen TV. Using Apple TV’s elegant interface and simple Apple Remote, viewers can easily browse, find and watch free videos from YouTube in the comfort of their living room.

Also of note is that users will be able to log-in to their YouTube accounts from the AppleTV so that they’ll be able to view and save their favorite videos.

YouTube support on the AppleTV is something that I’ve called for right from the start, and in many ways I’m not surprised to see Apple add this new feature. One of the reasons that the hackers have had so much joy developing unofficial add-ons is because the AppleTV’s software already has a plug-in architecture — suggesting that Apple always intended to roll out new functionality. (What upgrades do you think we’ll see next? Let us know in the comments.)

In more AppleTV-related news, Apple now offers a build-to-order version of its set-top-box with the option of a 160GB hard drive — priced at an extra $100 ($399). Nice!