I think that AppleTV is a good solution as long as you don’t mind losing a lot of compatibility. By itself, it can only playback H264 videos in m4v, mp4, and mov file formats.
You can use other programs (like RedKawa’s software, http://www.redkawa.com) to convert videos to the right format, but the processing on that takes way too long, and doing so makes it too inconvenient for regular usage IMO.
For compatibility, there are only two “real” solutions. Solution 1 is setting up an Xbox 1 Media Center (you can easily set it up as a media center only, like mine was for the last 2 years I used it). It’s all easily remote controllable and has a friendly UI. It’ll play back everything except some HD files since the CPU isn’t fast enough to handle the decompression.
Solution 2 is to build an HTPC, but that might be more work/cost than you need just for your bedroom. I built an HTPC recently using an Antec Fusion (http://www.antec.com/ec/productDetails.php?ProdID=08738) and Vista Media Center, and it’s the coolest thing I’ve done in my entertainment center–100% file compatibility, SD or HD anything, any file format, built in DVR, super nice and easy UI.
I really hoped that AppleTV would be hacked a long time ago to play more popular file formats within the main GUI, but the progress with that has been pretty disappointing. It almost makes more sense just to get a Mac Mini and use FrontRow.
That having been said, I have seen AppleTV in action and it’s pretty neat–just doesn’t play back all the files. It might suit your needs, but you have to make compromises with all of the available solutions thus far.
BTW, just found this: http://wiki.awkwardtv.org/wiki/NitoTV
This is a plugin for AppleTV called NitoTV, basically it’s a frontend for mplayer so you can play many .avi and .mkv files on your AppleTV WITH subtitles. A little inconvenient since you can’t work it from the main AppleTV interface, but definitely a nice plugin nonetheless if you decide to go this route.