Silicon Alley Insider’s Dan Frommer today is challenging Apple to move Apple TV from being a “hobby” to being a real business:

If Steve Jobs wants to make a serious run at owning our living room’s “digital hub,” then Apple TV needs a serious overhaul, ASAP.

Why now? Because even though the industry is still nascent, the Internet-connected living room is becoming more of a realistic proposition. And the market is quickly getting more crowded.

Frommer hits the nail on the head. What makes Internet TV interesting is that you and I and anyone else can publish videos on the Internet for anyone to watch. An Internet TV solution needs to bring that mix of professional and user-generated content to your TV, and make the process a no-brainer.

Apple is half way there with Apple TV. It does a great job of letting you watch your personal videos, YouTube videos and video podcasts.

It falls short in a lot of areas, though:

• For movies rentals, it lags about 89,000 movies behind Netflix;
• It needs to cut deals with Hulu and others to bring long-tail network & studio content to the device; and
• It needs to add a web browser to allow for Web streaming content.

Here’s Frommer’s suggestions:

• Open it up by adding the Web. The Apple TV is too confined. Add a Safari browser with all the plugins you’d need to watch videos from Hulu, MLBTV, NBC, ABC, Fox, etc., listen to audio from Muxtape, Last.fm, Pandora, and other sites that aren’t too directly competing.
• Add an optional Blu-ray drive. The DVD format isn’t going away for a while — at least for another 5 years or so. An Apple TV with an optional Blu-ray drive could replace the DVD player in every living room. An Apple TV without one is a compromise — there just aren’t enough movies on iTunes to make digital delivery a feasible, primary option today.

Apple needs to look one step beyond what Frommer suggests, though. It needs to open up the platform, like it has with the App Store for the iPhone, and let other people and companies develop plug-ins for the device.

If Apple did this, it would become a platform with a significant audience. Companies like Hulu would have a compelling reason to develop plug ins to deliver their content to the device.

Several programs have tipped a million downloads from Apple’s App Store for the iPhone in just a few weeks. The audience for Internet video will be a billion people within five years. Combine these two trends, and it’s easy to see that an open Apple TV could be a massive business, instead of Steve Jobs’ “hobby”.