Jailbreaking allows you to run extra apps or operating system that the ATV wasn't designed to as standard. For example, my ATV1 is jailbroken (or "Hacktivated" as it was known prior to iOS devices), so that I can run XBMC as an app on it. XBMC is a media front end, and the purpose of having it on my ATV is 1) it plays filetypes and extensions that ATV won't natively (.mkv, .avi, dts, etc) 2) it streams directly from a NAS on my network rather than from a computer running iTunes, and 3) lets me build a video library (which the ATV does, but XBMC does it better, visually)
The eBay seller is talking rubbish. As mentioned, people jailbreak the ATV to be able to view films they have already converted, mostly to the mkv format already, rather than having to re-encode them to a format a non jailbroken ATV natively plays.
Your determined to find cheaper anywhere but Apple! ;-)
Tbh, I agree that it's fairly expensive, but when you really price up the alternatives and their full cost of going to the video shop to get it and again to return and factor in forgetting to go back once in a while, which we all do I guess, then there's not much in the pricing structure. Then factor in the time you spend doing the above also, I would rather just browse from my sofa and watch in seconds.