It lacked content and quality, cost too much (both the hardware and downloaded media), and was too complicated. The Apple TV reboot is an attempt to address those issues and make it a well-respected member of the Apple ecosystem. (We say attempt because it's too early to tell if the updated model will satisfy current owners or convince those who've never used an Apple TV to take the plunge.)
This new Apple TV certainly wins on the hardware front: On the outside, it's a quarter the size of the original, a tiny black box that will likely run cool and quiet due to its utter lack of a hard drive. You can pick it up and hold it in the palm of your hand, easily. On the back is a small selection of ports, far fewer than on the previous model. If you don't have a TV that supports HDMI, forget it--this device has only an HDMI port for video out. There's also an optical-audio port, an ethernet jack (along with built-in 802.11n networking), and a USB port that Apple says is for support use only and not for any end-user functions.
On the inside, the specs have been updated to support 720p video at 30 frames per second (the previous model could only hack 24fps, and even then there were often issues). This is a big deal because a lot of TV-show content is shot at 30 frames per second, and Apple wants everything on the new Apple TV to be in HD, including TV rentals (although Apple does appear to plan on offering SD TV show rentals--presumably for any content not available in HD--for the same 99-cent-an-episode price).
As for the interface itself, it's going to be pretty familiar to current Apple TV users. It's the same remote-driven UI, with a series of menu items from left to right. The details have changed, and the Netflix instant-watch implementation Apple has done is very much in keeping with the Apple TV's design philosophy, rather than looking like every other Netflix implementation we've seen on various standalone and embedded devices. (There's no support for buying stuff anymore, just renting movies and TV shows--if you want to buy stuff and keep it forever, you'll want to do that on your computer and then stream it to the AppleTV.)
And the price drop to $99 might be low enough to entice the curious who would never have dropped $200-plus on such a device.