Seeing as there are a few "portable media centers" on the market allready (like
here), it's not beyond the realm of possibility for Apple to come up with a product-- particularly since they have their own video format (quicktime) and a retail outlet to provide media files over the internet. How big a step is it to go from iTunes to iMedia?
There is already a subculture of people ripping and distrubuting movies for playback on PDAs at 320x240 resolution with a files size "standard" of being able to fit on a 256MB flash card. Heck, I can even play movies on my cell phone should I so desire-- I put "Finding Nemo" on it just to show off, but the screen size is just a bit small for me.
The question I guess then is what kind of ripping will be available for this theoretical product. DVD ripping isn't quite so easy as CD ripping, and I'd think the movie people would be a huge roadblock on the way of getting any product out. So likely it'd be severely crippled with some type of DRM. Also, you have to ask, are people going to want to fork out $20 or whatever for a movie in 320x240 format and then download a 256MB file. I believe there have been a few trys at developing a model for this, but I don't think any of the companies that tried are still around.
But if anyone could pull it off, it'd be Apple. They pretty much already have the infrastructure for sales and distribution of the video files.