I agree that it makes sense that Apple will upgrade ATV along with iPhone 5 & 5th gen. iPod touch. If Apple does not upgrade the ATV with the A5 chip and enable 1080 they should give up on the set-top box market.
You're looking at it wrong... It's about cost and benefit. If they are still producing the A4 chip (which they will be for the cheap iPhone 4 @ $99) then they don't "NEED" to upgrade at all. The A5 chip costs more to produce and the Apple TV may not need it's capabilities. At that point, slapping the chip in there makes no sense at all. It costs them more, and Apple doesn't go on messing with the profit margin.
1080p makes sense, but again, they may not feel the need to do it. Higher resolution means more data when streaming. That bogs down performance on slow networks, and in areas where the high speed Internet sucks. This means that Apples "it just works" might not just work at all. If 1080 resolution is the only thing keeping $99 in your pocket, you probably shouldn't be buying the Apple TV when it does have full HD.
They shouldn't "give up on the market" any more than they should have given up on the desktop computer market when the Cube failed. For me the Apple TV is exactly what I need. A $99 dollar box that puts Netflix and all of my digital media on any TV in my home. It's cheap enough that I have three of them. Living room, bedroom, den. All able to pull up my library of movies with a couple of clicks on a simple remote or even my iPhone, none of them with a hard line to the computer in the office.
I think renting tv shows was an experiment that didn't payoff. It probably had to do with networks not shows much support for tv show rentals and low interest from consumers.
Renting was an experiment that showed them where the real money was in digital video: Subscriptions... Why get me for a buck to watch Ancient Aliens once, when I will happily give you ten bucks every month to have access to it and a whole bunch of other things at any time. It would be great if they could just snap up an existing service and roll it into iOS, but it may be a while before they can get the licensing and software up and running from scratch.