Engadget reports on the potential next iteration of the Apple TV that may move it from a back burner hobby to the front lines.

The Website is reporting on tips that the next generation Apple TV could be an impressive upgrade. With the rumors, the system would move to the iPhone OS platform. This isn’t too shocking as we’ve ponder as such just last week. (Google TV implies competition with Apple TV, but not really) Along with the iPhone goodness would be 1080p output, which would seem a given if it were to be a serious contender for the living room. Furthermore, the device would run on Apple’s A4 processor and come equipped with 16 GB of storage. The storage needs would be minimal as Apple would also offer up cloud-based media serving. Such has been rumored with the purchase of music streaming company LaLa and the company building a giant new server farm on the east coast. Beyond the cloud and built-in drive, the device would also reportedly pull content from local network storage such as TimeMachine.

The gadget blog says that a tip they’ve since confirmed with “a source very close to Apple” suggests that Apple has been working on the next version of the Apple TV. The goods according to them: it will be a very small box (smaller than the current one) with perhaps only outputs for power and TV-out cables. It will run on Apple’s new A4 chip (the one found in the iPad and soon the new iPhone). It will still do 1080p video, but may have as little as 16GB of flash memory. That’s because the thing will be based around streaming over the cloud (or from other computers in your home) rather than local storage. Most significantly, it will run the iPhone OS.

Basically, it’s an “iPhone without a screen,” is how Engadget hears it. Oh — and it will cost only $99, supposedly.

Engadget notes that there’s no word on if apps will be included with the product or not. But it makes little sense to use the iPhone OS for this device and not includes apps (at least eventually). As I noted, the reason Apple hasn’t been taking the Apple TV seriously up until now is because they hadn’t figured out the best way to make money from it. That’s largely because Apple makes money off of hardware sales, and for devices like the iPod, those are driven by the availability of content at a good price. That’s the reason the Apple TV has failed to catch on: not enough content at a good price.