How is the cost lower, for comparable quality content? It seems to me that YouTube has higher costs per viewer than conventional TV, and that production quality must be at least as good as regular TV to attract the same ad revenue.
What changes is the competitive landscape--when there are a billion videos to choose from, as opposed to 20 or 50 or even 100 found on broadcast or cable or satellite, the eyeballs on any one drop. Obviously the aggregator is the natural place to sell the ads (bully for Google), but the ability to focus efforts on "blockbuster" shows is a bit different. I worked in television for several years right out of college, and blockbusters are a major part of the operating budget of a TV station because it's a limited commodity--if you want to advertise during Lost, you've only got one company to buy from and there's only a couple dozen slots for sale. Cheaper spots are actually often more effective (since you can run them a lot more and get a single viewer to see your ad multiple times), but there's still magical thinking in TV advertising and advertisers like to reach the blockbuster audience. When the blockbuster no longer exists (as seems likely in a future of a billion+ possible videos), monetization will shake out differently. But advertising isn't going away, so something will happen and it'll all work out somehow.