Today, Engadget featured a story outlining Apple’s next move in what many have dubbed to be their “war” with Google. According to a source they claim is very close to Apple, the company has been working on their next incarnation of Apple TV for quite a while.

“The new architecture of the device will be based directly on the iPhone 4, meaning it will get the same internals, down to that A4 CPU and a limited amount of flash storage — 16GB to be exact — though it will be capable of full 1080p HD (!). The device is said to be quite small with a scarce amount of ports (only the power socket and video out), and has been described to some as “an iPhone without a screen.” Are you ready for the real shocker? According to our sources, the price-point for the device will be $99. One more time — a hundred bucks.”

If this source turns out to be correct, Apple is poised to offer a lucrative alternative to Google TV, much more so than with their current version of ATV.  The low storage capacity of this new device is a strong indication Apple is moving towards a more streaming based platform, although it is likely users would be able to access their media libraries contained on their other Apple devices.  Additionally, the rumored price would provide those undecided potential customers a serious incentive to go with Apple.

Centering the device around the iPhone OS platform offers a challenge similar to the one Google is surely facing: scaling the applications and interface to function well on larger resolutions.   It is likely that devices like the iPhone or iPod Touch will act as controllers, similar to what Google will be implementing on Android powered smartphones.   Apple’s current focus on app driven content will most likely carry over to the new ATV, and while the entire app store will likely not be ATV compatible, many developers would have a serious incentive to tailor their content for the big screen.  Imagine playing your favorite games on your 50 inch LCD and using your iPhone as a wireless, motion based controller?

With WWDC 2010 right around the corner, all eyes will be on Apple in anticipation for the announcement of the new device.   Exactly how worried Google TV has the world’s largest tech company (as well as how far along into the development stages this new ATV currently is) will certainly reflect on how soon an announcement is made.   One major thorn in Apple’s paw could be Flash.  With major streaming sites like Hulu still utilizing Adobe’s format, users wanting to be able to access all content on the web might shy away from ATV.  One thing is for certain though, Apple is not going to walk solemnly off into the sunset, and the “war” between Google and Apple is about to get much more interesting.