I would think they would need to come in significantly cheaper to get much market share, although if they are aiming for PC gamers, they may have enough of a market anyway. I can certainly seem my wife wanting to play her games on the TV. Me, not so much. And if the developers are already into PC and Linux gaming, the extra programming and support costs might not be that much worse than licensing costs. I think perhaps I've given Gabe too little credit by assuming he has an uphill battle to get developers on board when, considering it, he probably already has them on board. Except maybe for big competitors like EA which compete (or want to compete) on distribution as well as on content.
Developers can assume that no one is buying extra hardware to stream games to a SD TV, so the resolution is known as 1080p. Sound too is easily detectable or at least settable. Those two pieces make it possible for developers (with Valve's guidance) to establish groups of "good", "better" and "best" for any particular hardware configuration, either across the board or by setting performance targets. From there, add auto-detection and the game can set the level of performance accordingly for each SteamBox even if they are upgradable. You might not get the very best performance your hardware is capable of providing, but you'd know that you could load a game and it would be playable without any fiddling required, which is the essence of a console and a very good thing. This could work.
Console market looks pretty crowded at the moment though, and a SteamBox would be competing with three brand new designs. Barring some excellent home theater application, I don't see how this competes other than on cheap game costs, in which case I don't see why developers would jump on board and stay on board.