How can I diagnose my iPhone 4-Time Capsule wifi connection problems?
Have you tried testing the connection coming straight from the modem? The only good way to really test this is by connecting a computer directly to the modem over ethernet and seeing what kind of connection you have.

Does Airplay work for you? If so, another reason why I think there's nothing wrong with the router. Have you done a hard restart of your modem. Try that first as it's the resist thing to do.