The OP can do what he wants with the older previous gen ATV, as I was in the same situation. My 360 was used as a media streamer but given that MS have chosen to completely ignore the media side of the 360 I gave up about a year and a half ago.
I run a standard ATV hacked with a 'Patchstick', that contains XBMC amongst a heap of other stuff. This all just latches onto the front end UI and can easily be removed if required.
The ATV then plays back virtually any media format via XBMC as my ATV is wired to my network and can see all my video media on my main PC. The only limitation is that the previous gen ATV struggles with certain 720p encoded content due to its ancient CPU.
It's a superb replacement for the clumsy 360 setup though. It's sad that MS just chose to pretty much do sod all with it.