Every minute someone watches them is a minute that they aren't watching a potential competitor
In this sense, having a free tier at all is effective to suffocate competition, even if most users enable adblock
Actually, they would prefer if all of the ad-blocking, refuse-to-pay customers would spend a lot of time on their competitor's websites.
If they go to a competitor and block ads and consume bandwidth, then they are actively costing the competitor rather than costing Youtube for hosting.
Youtube allowing competitors to host would just consume youtube's bandwidth but with the 'views' also going to the competitor's domain (so the competitor could then potentially get additional sponsor support for having 'eyeballs' on their domain).
The vast majority of the playerbase (70~80%?) are Free2Players (F2Pers), while the rest are whales (paying players) and an even smaller subset of them are space whales who spend enough in a month to buy a luxury car or two.
The games go to great lengths to retain those F2Pers because they are the ones the whales and space whales play together with and/or against. No F2Pers, no whales, no game, no business.