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This device world be a pretty cool server if you could put your own OS on it -- kind of like a much faster Raspberry Pi with built in wif, flash storage and PSU
Kind of like, but at an almost 3x the price tag.

Better but higher priced.

If you factor in the case + better specs, you'll find that it's a good value. I played with this idea a bit. I disabled unnecessary services, etc. Got it pretty bare ... but it's very hard to get a proper toolchain going. In the end, you'll need to cross-compile everything and doing everything right can be a real grief. It's really not worth it unless you can shoehorn Linux in there ...
This is not new. SheevaPlug, TonidoPlug and all the other variants... an ARM ~GHz CPU, 512MB of RAM, USB and ethernet in a 4" case. It runs Ubuntu and only draws 3 watts of power. I've had one running my nightly server backups for years. Cost less than $100.
Most of those don't have a decent graphics card that can run 1080p video and do H.264 decoding in hardware like the AppleTV. They make great Linux boxes, but are lacking in the media center department.
All of those plug computers have massive heat problems. Also, although they are frequently rated in the GHz range, their actual performance is absolutely terrible. The Apple A5, on the other hand, is a real workhorse with no heat issues.
Do you have to compile because it's ARM?
512 MB and USB port makes it a fantastic target for a low power server -- it'd really like to run a Linux on this. Compare it to Raspberry Pi, the first neither has a box and WiFi nor a power supply and remote control and most important, it has twice as less memory... It seems a very good hardware for 100 USD -- the major problem is probably the need to jailbreak it.
Or a great dedicated console emulator. It has enough ram I think to even play the larger neogeo games.
Plenty. I played the entire MAME offering on my 32mb box (ca 1999)
"twice as less"

Half?

It will be amazing when apple opens up appletv app store. I had high hopes for android non phone apps, but aside from Netflix/Hulu/chrome on googletv, nothing good has come of it. Maybe the iOS ecosystem will be better.
My understanding was that while the device is certainly powerful enough to power apps, the UI Toolkit is simply not ready yet for normal devs to use. I'd love to developer apps for this.
It's more a total lack of documentation. I haven't actually looked at the new OS update yet, but I've written a couple of 'apps' for some jailbroken ATVs I have, to display some custom visualisations/data.

Deploying apps is a bit of a pain for the 'average' iOS developer, and for obvious reasons there's bugger all documentation...since the current captive market is so small (people who've jailbroken their units, basically), nobody really has any impetus to move things forward. The actual frameworks are a little limting, but not horrific...not hugely worse than iOS 1.0 before the SDK was opened up.