YouTube could probably theoretically embed the ads in the video itself.
This. I have always wondered why they don't just do that. If you wanna serve ads so hard, just make them technically indistinguishable from the actual content. (Please don't.)
My assumption is that they don't want the ad to be fast-forwardable -- their own client restricts that -- but I'd think that having fast-forwardable ads would be preferable to no ads at all via a given distribution mechanism.
The ads are per-user and the video can be static, but I'd think that they could put together a piece of software that reasonably-efficiently splices per-user data into an existing video file.
I think its because, if you put it in the video itself, you will have old ads in old videos. And the companys wouldnt pay for ads for a product wich isnt made anymore.