New Apple TV plays 1080p, outputs as 720p
More good news on the new Apple TV front, the new device actually does play 1080p content that is streamed to it, but it downscales the video quality to 720p. This means that your existing 1080p content is being decoded and will still work on the new Apple TV, although for now it is being downsampled to the lower 720p resolution for playback.
The 1080p to 720p downsampling has been confirmed by several users on MacRumors and Handbrake forums. We’ll keep you posted on any new developments.