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This might be the right model if web media were an ideal marketplace, with a variety of competing options to choose from.

That's clearly not the case. A better model is that Google has tried to limit your options to "either do business with us or don't watch popular media", with only partial success because a lot of people don't like either option. I think the truth of this model is betrayed by the fact that Google has not (yet) embedded the ad in to the same video stream as the content. They have not really tried to out-block ublock because they'd rather you steal youtube videos than support a different platform.



Isn't the reason simply that reencoding would cost more than the loss of revenue from blocking?




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