Set top box (ATV upgrade) with app store and new form of remote would, IMO, go nuts. I'd like to see MS Surface-type technology within reach of the public but doubt the market would be as big as a set top box?

This is my prediction as well. If I look at everything Apple is doing content-wise, ATV seems too small (figuratively speaking) in comparison. I want to control my TV with my iPad. Apple has to be concerned about Google's somewhat strong (albeit supposedly buggy) foray into the living room. How can they give away this territory without putting up a better fight? I predict that the killer feature will be optional control via an iPhone/iPad. The 10' interface stinks for content selection and other input-intensive activities although it's great for a shared viewing experience. The new ATV should turn my A/V set-up into a seemingly dumb slave of my iPad. Some IR repeaters to do Harmony-esque things would be a huge bonus. I also predict that this device will be Google TV-like in that it acts as a pass-thru for other, "legacy" devices. The interesting question will be whether it will include a Blu-Ray player. Of course, I have no special knowledge of Apple's plans -- I'm just looking at all the other cards Apple has played and imagining a product which makes the previously played cards look like brilliant moves.

Why oh why would Apple build an actual tv when they can just build a box that plugs in to EVERY tv and puts iOS on them??

I don't understand why everyone thinks Apple are going to build a tv, it's a ridiculous idea.

Because there is a layer of UI/UX between the screen and "their box" that Apple traditionally hates. If there is an Apple TV with a screen (and I'm not saying there will be) then you can be sure the input switching madness, weird motion interpolation, iron-maiden remotes, and shitty setup experience will all be gone. If it ever comes to exist, it will exist to close that final gap between Apple/iTunes and your couch.

That makes some sense.

However I would then argue that Apple should put all the 'TV stuff' (cable input, av input, etc) in the Apple TV and have that plug in to the TV. Added benefit of being way more portable/modular.

EDIT:

Actually I'm not sure that makes sense. It seems like Apple's goal is to get you consuming content through Apple. How would a TV be any better for that purpose than the Apple TV? With the growth of streaming video and the decline of cable it seems dumb to optimize for cable. The user experience would be for you to leave the input on the Apple TV all the time and do everything there -- tv, movies, iOS games/apps.

Basically because Apple wants to control the whole experience from turning it on to turning it off. Not saying that everyone cares about that level of integration, but if the past is anything to go by then Apple does.

They already sell displays. Integrating ATV hardware into a display is not a big step.

display != living room tv

This is a crucial point. The displays Apple sells are nothing like your average Living Room TV in dimensions, service requirements, or capabilities.

Apple doesn't have the retail floorspace to stock or sell 50" TVs, they don't have experience with cable tuners and all of the other associated crap that distinguishes a TV from a simple display, and they don't have in-home warrantee repairmen; expecting the purchaser to schlep a 50" behemoth to the genius bar for service is out of the question.

Why am I being downvoted? Turning their display into a tv may not be a big step but turning their display into a tv that will replace the current living room tv certainly is.