Microsoft’s announcement of IM integration and a QWERTY keyboard for the Xbox 360 are both very nice, but it’s another announcement that could be more important – the inclusion of support for 2 more video codecs on the 360: .mp4 and H.264. These additions make it more clear then ever before: Microsoft is winning the war for the living room.

With the PS3 struggling mightily on the market, and the Wii not even having an online play network up and running yet, the only competitor for Microsoft is of course, Apple with their Apple TV. But I saw the Apple TV running for the first time last week, and I, like others, was pretty underwhelmed.

There has been talk that some of the TVs in Apple stores aren’t configured properly and as such make the output look poor, but the picture I saw was basically the same that I saw on my computer…the problem is that my computer monitor is 20 inches while the TV was 40-some inches. When blown up to that size, the picture does not look very good at all.

This is where I feel Apple has made a mistake. In a time where High Definition video is finally making a big splash on the market, Apple decided to go the other way, reverting to almost broadcast quality standards. I remember when Apple first launched movies on iTunes there was talk that they would be near-DVD quality…on the 40-inch TVs at the Apple Store these movies are nowhere near DVD-quality.

Now I understand some of the reasoning behind these moves.
1) It would take an incredible amount of bandwidth to have a full HD quality movie download store from the central hubs that Apple runs iTunes on.
2) Many consumers don’t have the means right now to hold more then a few HD-quality movies on their systems (and certainly not that many on the 40 gig hard drive of the Apple TV).

But I think Apple’s mistake in this regard is refusing to do movie rentals. While it’s true for music that many people want to own the songs and not simply pay to stream or rent them, music rental was never a big business. Movie rentals, however is a huge business; people like renting movies. Do I want to buy a movie like Employee of the Month? No. Will I rent it? Yeah, sure why not.

Xbox 360 offers movie rentals, and in HD no less. It will also play HD TV Shows, HD-DVDs (with the optional $200 player), oh yeah, and great video games. Apple TV? It will play mediocre-quality movies you purchased, mediocre-quality TV shows you purchased, no Blu-ray, HD-DVDs, or even regular DVDs for that matter, and will only play the very basic iPod games. Where is the contest?

Now Microsoft has added support for both .mp4 and H.264 encoded video files – the very same video files that Apple’s iTunes will play – and boom, Microsoft is winning on another front: customer options. I had previously started ripping some of my DVDs onto my computer in .mp4 format (only because H.264 takes way too long using software conversion), but I was thinking for a while that perhaps I should stick with some other video format, so the files would play on the 360…well that problem was just taken care of with a simple update. It’s full steam ahead on the DVD ripping now.

I do like Apple TV’s slick interface. I love how responsive it seems to be. I also love it as a way to watch video podcasts on your TV. But IPTV is coming for the 360 as well. If they would simply add built-in Wifi on the 360 (it’s completely baffling that they don’t have it) and allow for the wireless streaming of say, music, from your computer, it would be game over.

I know that Apple TV is set up for future 720p HD content, but when is Apple going to get around to offering it? Why would anyone buy the mediocre quality stuff now when they know that the HD-quality stuff is coming? And not to be a stickler, but 720p is still not 1080p…you might need to wait for the next iteration of Apple TV for that.

It’s nice that Apple doesn’t seem to be aggressively going after the hacks for the Apple TV, but many of them are just things Apple perhaps should have included on the device in the first place (the genius RSS plugin). Apple should also definitely consider putting iChat onto the Apple TV now after this latest IM-integration move by Microsoft. Joost as well offers IM-integration and it works very nice, seamless while you are watching TV. I’d love to see something like this on Apple TV.

Frankly, I can’t really see why anyone would want an Apple TV over a Mac Mini – which you can pretty easily hook up to your TV. True, the Apple TV is a few hundred dollars cheaper, but the Mac Mini is so much more powerful and has nearly limitless capabilities. If you don’t want to spend quite that much money or are at all interested in videogames, get an Xbox 360, the device built for gaming that seems to be close to dominating the living room in all regards.

[UPDATE]: A mere one day after my post it seems HD Video is coming to iTunes and Apple TV…in the form of a video podcast by The Washington Post. The reaction around the Internet seems pretty ho-hum. Wow, a video podcast from a newspaper in high definition (720p)? Yawn.

There is also word that streaming these larger files to the Apple TV causes some hiccups in playback. So again, a Mac Mini seems to be the better choice.

[UPDATE 2]: Ars Technica’s take on Apple’s whole online movie situation – pretty much in line with mine.