There's a third option: ride it out on the revenues from the other business lines until the advances in software, processing speed, power consumption, storage, and network bandwidth drop your costs to a profitable level.
There is no way the vast amount of free, professionally made, high-quality content we have available online now continues without some sort of tradeoff in either cost, increased ad exposure, or reduction in quality. The transition period the internet is in right now has to end sometime, and I'm pretty sure it will come down squarely on the side of the content providers/producers.
I was simply using YouTube as an example of something that, absent of Google deciding to run it at a significant loss for 5 years (far from certain), will have to change its operating methods to something less pleasant to the consumer.
The only thing I ever said was that YouTube wasn't a good example supporting your point, because it was in a completely different situation from most of the rest of the web, and that because of its unique situation, it actually could continue on at a loss for quite a while longer than most.
In other words, you were kind of right, but for the entirely wrong reason.