One thing is clear after Steve Jobs unveiled both YouTube functionality and a much larger hard drive for the Apple TV at the D Conference today – Apple knows their device isn’t all they cracked it up to be.

I mean did you hear Jobs calling it the “hobby” product compared to the other real products (iPod, iPhone, Mac, etc)? It really is like an unloved step-child. Me using the word “downplay” is a downplay of what Apple is doing to the Apple TV here.

At least they are listening to customers and fans and trying to make the device more worthwhile. The YouTube channel is nice from a content perspective, but it certainly won’t help the talk of poor video quality – even with Apple converting all the videos to h.264 (which seems a bit odd to me).

The 160-gig hard drive is nice as well (topping the Xbox 360 Elite’s 120-gig), but this is even more odd to me. When they first announced the device last year, Apple made it seem like it would purely be for streaming and that no hard drive would be included. Then they announced it would come with a 40-gig one upon launch. Now, just a couple of months removed from that launch, they’re quadrupling the hard drive size (though much less then the 1-terabyte drive I was hoping for)?

Okay so you have a 160-gig drive on this thing – but Apple TV still doesn’t have a DVD drive to rip movies to it, nor does it have a built-in way to connect to iTunes to download directly – so since you need to sync with your computer still anyways, why not just stream from there like you already were doing? Do you need a 160-gig buffer? I think not.

To me, this upgrade is pretty pointless and maybe even ill-conceived considering you just pissed off all those people who bought the initial one only to be trumped a few months later.

So why’d they do it? I think Jobs and co. know they missed the boat on this one with regards to functionality and the video content quality. Jobs himself even stated almost off-handedly at the conference that HD content would be coming to the iTunes Movie store – it was like he wanted to put it out there but in such a passive way so as not to seem to be conceding their mistake.

This 160-gig hard drive has to be meant for HD movie downloads, it’s just the only way it makes any sense (though I would still argue not that much) – so you can probably expect those to be coming soon.

So why not just announce that today as well – what is taking so long for them to jump to HD? Well perhaps Apple is in fact working on an iTunes movie rental service like I’ve been calling for for months. I hate to repeat myself, but I’ll rent The Guardian, but there is no way I’m buying it.

So you can get a 160-gigabyte Apple TV for $399 or a 120-gigabyte Xbox 360 Elite for $80 more. I’ll say again, if you are at all into gaming, there is no contest – get the 360. Frankly, even if you’re not into gaming I would still say go with the 360 – at least Microsoft already has their HD movie downloads up and running on Xbox Live Marketplace. Even if you opted for the $299 or $399 version of the Xbox 360 you would still be getting a DVD player, a very capable media streaming machine (with Connect 360 or the Media software for Windows), oh yeah and a full-fledged next-gen video game system. If you really care about aesthetics and low fan noises, get the Apple TV, otherwise this still isn’t a debate in my mind.

Apple TV “1.5″ is better, but it’s also just a mulligan for Apple. Even they need them sometimes.

[UPDATE]:You can see the video highlights of Steve Jobs talking with Walt Mossberg on The Wall Street Journal’s D: Notebook.