Gruber is lamenting AirPlay's partial implementation even with iOS 4.2.1.

Daring Fireball: Video Support for AirPlay Is Limited in iOS 4.2:

HD movies rented or bought from iTunes tend to be encoded with bitrates of about 5 Mbit/s. Video clips shot on the iPhone 4 have bitrates of about 10-11 Mbit/s — the iPhone doesn’t have the processing power to compress movies tighter than that. [emph mine]

Gosh, I hate it when people oversimplify like that. It's no big deal, but it hits a pet peeve. Look, my Commodore 64 is able to compress the video if given enough time and some really slick programming and hardware interfaces. It's not that the iPhone can't; it's that the battery power and post-processing time means that Apple chooses for it not to. Can the iPhone compress video to 5 Mbit/s "live," while it's recording? Probably not without throwing away some of its camera's resolution, but that's an easy fix, isn't it? Record fewer pixels to begin with, and you've got less to process on the fly...

So the iPhone can take 10-11 Mbit/s video and compress to 5 Mbit/s at least two ways: 1.) Post-process 2.) Take lower resolution video. It's not a processor-limited arrangement. It's battery/simplicity/quality/time. Pick a few.

Of course he later admits that the theory (not his own, I should add) that AirPlay doesn't play video recorded with the iPhone because of the resolution.

But that doesn’t seem to be the case. If you take a video shot on your iPhone, import it to your Mac, then put that clip in iTunes and sync it back to iPhone, you can then play that same video file over AirPlay using the “iPod” (on iPhone) or “Video” (on iPad/iPod Touch) app.

Apple's one of the most comfortable companies I've seen at obviously putting in software limitations to push something out the door. Not tested? Release without and save something to add back in later. Leave the cash on the table now, and come back for it once you've made it right. It's not like they're hurting for cashflow, so this is smart business, I think.