These guys should consider trying AIR or Silverlight rather than a Java applet for a more transparent and lighter weight implementation. Java applets are quickly going the way of the dinosaur..
I don't think you can bind to local ports and run servers inside AIR or Silverlight, but you can in Java applets.
They could theoretically have 100k P2P Java applets running on "super node" (high bandwidth) machines serving an audience of millions of leeching peers. Hopefully they've realized this. It's probably the best way to mitigate the applet problem: only require 10% of people to have it.
Your distributed idea is cool, but I think the intended benefit here is to avoid escalating hosting costs when having to do it all in-house. YouTube was paying $1M per month in hosting fees pre-google acquisition.. ouch