"...a watered down version or just serve them up crapply encoded videos/images etc"

That is actually a REALLY good idea - serve up smaller, low resolution content and let me easily BUY the higher resolution content (as a download, not some kind of time-limited thing) via a micropayment scheme.

That sounds better than an ad-supported model to me. However, I disagree with the idea that webmasters will "win" this battle - filtering proxies will just get more prevalent, smarter and easier for the average user to install and run. All my LANs already use Privoxy and I'm toying with enforcing it via Group Policy / WPAD / PAC.