Apple has announced a major update to its Apple TV device, its ‘Take 2′ software update.

Take 2 is a major revision of Apple TV’s software adding new features to the set-top box, including HD movie rentals and trailers, iTunes music store, access to Flickr photo galleries, in addition to accessing YouTube videos, and Podcasts.

The original device was announced in September of 2006 and went on sale March 2007. It featured a FrontRow-styled interface, built on top of a modified version of the Mac OS X “Tiger” operating system. The device would wirelessly connect to a home network and Apple’s iTunes music software on either Mac or Windows computers and synchronize content from iTunes to its internal hard drive.

Take 2 enhances the Apple TV to, in my opinion, what should’ve been the initial release of the software. The 2.0 software refreshes the Apple TV into a wireless Internet appliance, rather than a complimenting device. Take 2 adds iTunes connectivity with movie rentals and purchasing, Flickr connectivity, and enhanced YouTube connection. The need for a separate computer with iTunes for synchronizing content is now optional, rather than a requirement.

While the Apple TV has some-what created it’s own niche into creating a market as a digital media receiver built into a set-top box, but it still has a long way to go before it can become an all-in-one digital media center. I see that its major competitors are DVRs, mainly TiVo, and Digital Cable DVRs (no-name brands usually issued by cable companies).

I believe that in order for the Apple TV to become a more prominent player in the digital set-top box market, it needs to raise the bar above its competition. Streaming videos from YouTube or photos from Flickr are great, but those features alone don’t let the Apple TV stand apart from the other’s. For one, it’s tied to iTunes, while I understand Apple’s reasoning behind it, not everyone wants to buy or rent movies from the online store. Recently, I’ve noticed commercials from NetFlix, offering online rentals, much like iTunes. Now, if Apple could come to terms with NetFlix and offer movie rentals through NetFlix or iTunes, that would be beneficial. Or, you can use your NetFlix account to access either the NetFlix or iTunes libraries.

NetFlix access aside, the Apple TV is still lacking two features that I believe are holding it back from leading the digital set-top market: An Optical Drive and DVR functions.

The lack of an optical drive is understandable from a business stand point, but it doesn’t make much sense to the consumer. People have bookshelves full of DVDs, and some people are switching out their DVDs for Blu-Ray Discs. Apple is pushing this box for HDTVs, which is fine, but when it was first released, the iTunes Store didn’t have a lot of HD content. Now, the library for HD content has grown big since the Apple TV was released in 2007, but not every movie in every genre from every studio is in the iTunes Online Store, and since the most recent iTunes update, only a select movies are avilable for rental while others are up for purchase only.

As far as DVR and cable-box type software not being on the Apple TV, I can understand their reasoning for omitting those features. Why allow someone to record every episode of “Ugly Betty” or “Terminator: The Sarah Connor Chronicle” when they’re for sale on iTunes? It  doesn’t make sense, but if Apple wants the Apple TV to be a full-featured digital set-top box, Apple needs to step up their game and find a way to add DVR-like functions to the Apple TV.

Maybe I’m expecting too much from the Apple TV, or maybe I’m missing Apple’s point of having this device, but I’m still half-expecting the 2nd Hardware Generation to include a Blu-Ray player. I mean, if this thing is supposed to sport HD support, then it should support the HD media, like a modified Mac Mini with a Blu-Ray drive, 2 GBs of RAM, 80GB - 160GB or 250GB hard drive, and a 1.8GHz Core 2 Duo processor with a FireWire connection for digital camcorders.