I agree, iTunes store is not the cheapest, nor has Apple got the movie sharing thing working good yet (if ever). They tried to get companies like MGM & the like to buy into the same setup as the music on iTunes store, but not all of them are convinced it will work like the music side, at least yet.
I simply convert my own DVD's to my external harddrive (399 and growing right now).
Simply, the economics of it for me are: I buy new release movies--$15-$19. I rent or buy older movies--$1-$4 to rent, $5-$15 to buy. iTunes store rents for $2.99 as you said, and $9.99 to buy. I think it is a fair middle ground for what it is. But like I said, I don't go that route.
If someone was considering the AppleTV, I suggest the lesser expensive 40GB model. Don't sync much but photos to the ATV, it is a waste. Stream movies or music when you want it, it is much more efficient and you don't even realize its doing it. Takes maybe the first 3-5 minutes of a movie to stream it to the ATV, then its done. Nothing is saved on the ATV.
Another beauty part of the ATV, you can listen to podcasts, radio station (all through iTunes) and your own music while having slideshows of your photos. This is great while entertaining, as there is music on, and no "TV" for anyone to be distracted by. Just your own family photo album. We love that.