Settings -> Display -> Scroll down -> Turn off power saving mode
Powersaving mode is actually just setting CABC display mode to something that uses less energy at the cost of display quality and has nothing to do with timeouting.
The correct answer is using Simple Brightness applet, as said in this thread already.
edit: Applications themselves can keep the display on by asking MCE to keep the light on with 45 second intervals, which is what standard mediaplayer does when video is playing.
Simple Brighness Applet, is what should been built in. However I would love if it include 2 more clicks, very dim (the level right before the screen goes off) and backlight off. The n900 looks great in the sun, I would love to save power by turn off the light all together. Would that be possible? Should probably ask the dev or start a thread on it.
It does when it's following your position with the GPS. Otherwise, you must touch the screen every XX seconds, or install the software people talked about on this thread.