Let’s start with the experience inside Apple’s walled garden. The Apple TV will let you stream any content you have within iTunes. Unfortunately iTunes doesn’t play well with anything that’s not in a .mov, .mp4 or m4v container. Then there are the Apple TV limitations: 720p H.264, main profile level 3.1 (or lower) and AAC-LC audio (160Kbps per channel).
You can technically feed the Apple TV 1080p video, but it’ll always downscale to 720p. I haven’t found any evidence of scaler hardware inside the Apple TV so there’s a good chance the box won’t work with older HDTVs that can’t accept a 720p input. I don’t have anything that can test that here so if you have experience with such a setup, please let me know.
Most content acquired outside of the Apple ecosystem isn’t encoded to these specs, so if you’ve got your own library of DRM-free video you’ll need to transcode to get it into iTunes. On a fast enough system it’s not that big of a deal but it’s still annoying to do.
Mac users will probably want to use something other than QuickTime for transcoding however. While QuickTime is very simple to use, the performance on multi-core/multithreaded systems is atrocious compared to other tools like Handbrake.

With your videos transcoded, you can stream them very easily over to the Apple TV.
There’s just one problem with all of this. While the Apple TV makes you jump through hoops to play your own content, devices like the Popcorn Hour, Patriot Box Office or upcoming Boxee Box will play virtually everything you have, regardless of container or format.
Out of the box the Apple TV isn’t a good way to play your existing, non-iTunes content. It’s the same limitation that Apple had with the original Apple TV and it’s part of why the product is nothing more than a hobby. Now let’s get to the other reasons.