Apple (AAPL) has issued a software update for its Apple TV set-top boxes. This is a fine, if small, update and should make the gadget more useful for people who already own one. But it won't attract new buyers this Christmas.

Specifically, Apple added the ability to stream music over your home network via "AirTunes," the wireless music feature built into some of its wi-fi base stations; support for third-party remote controls; playlists; and music volume control.

As we said, a fine, incremental feature update. But not what Apple TV needs to take off. We think that Apple still ought to:

Open Apple TV's software up a little so it plays Internet video, not just iTunes video. We'd like to be able to watch Hulu, NBC.com, CBC.com, Major League Baseball, Netflix (NFLX), etc., videos via Apple TV. The easiest way would be to add an Apple TV-flavored Safari Web browser with Adobe (ADBE) Flash and Microsoft (MSFT) Silverlight plugins.

Or Apple could make a lean-back interface like NYC-based software startup Boxee already made for watching Hulu and CBS, which can be added to Apple TV via a clever hack. (Update: The 2.3 update disables Boxee on the Apple TV. More info here.)

Simple, but a change in strategy for Apple.

Sell new Apple TV boxes with built-in DVD players. Right now, Apple TV is just another box in your living room; it doesn't replace anything. With a Wii and a DVD player, we don't have room for it on the back of our TV. But if Apple replaced our DVD player, we would. We don't think we're alone here.

Just a quick update on the status of the Apple TV software upgrade: according to Apple's web site, the software is not quite ready and will be available in one to two weeks.

As we covered during MWSF, the Apple TV Take 2 (or as I like to call it, Apple TV Redux) will feature support buying music/movies/rentals directly from Apple TV, HD rentals and the ability to view pictures from a Flickr or .Mac account.

The update is free to existing customers and will presumably be shipping standard on all new Apple TV's as soon as it is complete.