Apple tv video quality vs hd tv and high def dvd's

ok...i know it supports 1080i, but does the video quality of video in itunes really look good compared against say a blu-ray disc, or hdtv signals? i'm sure it will get better (with a hardware or software upgrade?) if its not close to high def quality but want to know what i'm in store for if i buy appletv now...thanks. PS: i currently have directv HD and a ps3 for blu-ray, and my tv's are all HD...

Based on my own testing, the distinctions between an HD-DVD movie (which are true 1080) and an Apple TV video converted as its own maximum settings (which is 720) is actually quite noticeable if you have a 1080 TV set, but at the same I don't consider it a show-stopper. I watch a lot of HD broadcast content that's only 720p, and it's still very good.
An HD-DVD or Blu-Ray DVD will normally be in 1920 x 1080 resolution (1080p or 1080i, generally depending on your equipment). The Apple TV's maximum resolution is 1280 x 720 (basically 720p). Therefore, even an original HD-DVD or Blu-Ray DVD converted to Apple TV will need to be scaled down to 720p for display on the Apple TV.
Further, Elgato EyeTV actually scales these down somewhat lower, so HDTV recorded content could be even worse-off, depending on the original source. The standard Apple TV export settings use a 960 x 540 frame in order to keep the bit-rate and frame rate within tolerances (since a 720p signal is approximately 60fps, and the bitrates will generally exceed 5-6 mbps, which pushes the limits of the Apple TV).
Even more interestingly, Elgato's new turbo.264 dongle will only encode in "Apple TV" format at a maximum resolution of 800 x 600 (and if you do the math you will realize that this will be considerably less for a 16:9 aspect ratio video).
The result is that videos converted from an EyeTV Hybrid are technically much worse off on the Apple TV than viewing the original source material. Whether this is significant enough to be noticeable will depend on your output medium, but on my 62" DLP, the difference is quite apparent (although still far superior to an SDTV signal).
You can get 1280 x 720 content to play back at 60fps at 5mbps bit-rates on the Apple TV by using ffmpeg-based encoders and manually selecting higher settings, although it's been hit-and-miss in my own testing, and of course it creates gargantuan files. Elgato and others have obviously tried to stay with the more conservative settings to ensure that they can guarantee the broadcast possible range of support.
In fact, although most of the standard encoder settings max out at 2.5-3.0 mbps, I've successfully pushed up to 6 mbps through the Apple TV, although such content has to be synced rather than streamed, since even an 802.11n network has a hard time keeping up (it worked, but there were some drop-outs and glitches in the process). Of course, 6mbps content is going to fill up the Apple TV hard drive pretty quickly as well (you'd only be able to fit around 11 hours on the internal 40GB hard drive).
The other thing to keep in mind with DVD movies is that they come from film, which is a 24fps source (based on the physical nature of film). As a result, the distinctions between a 720p and 1080i signal are less prevalant when dealing with film content, since you won't get the full 60fps HDTV capabilities anyway. Interlacing can still create some nasty side-effects, but it's far less of an issue when you're dealing with less than half of the normal frames.
In my own experiences, I have an Apple TV that is connected to a 1080p upscaling DLP TV (native 1080i input, internalized de-interlacing), and a second Apple TV that is connected to a 720p LCD TV. With the first Apple TV, I can notice the difference between 720p and 1080i output settings only when viewing photos, since the remainder of the standard content doesn't exceed 720p anyway. Further, because my TV de-interlaces a 1080i signal to 1080p, I don't get the flicker that is normally associated with a 1080i signal.
On the second Apple TV, I leave the setting to 720p, since that's the native resolution of the second TV, and I get noticeable interlacing-based flickering on the 1080i, particularly with photo slideshows (mostly in the transitions).

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