Youtube: is it Apple or O2?

A bit of both. The iPhone automatically degrades the quality when on 3G or EDGE because:

1. It would take ages to load, so in Apple's eyes it's a "better user experience" because it buffers faster.

2. O2 would get pissy at Apple for allowing users to stream full quality YouTube videos over 3G and EDGE.

 

You can easily have Wifi quality Youtube videos anywhere. It's very simple actually, just jailbreak your iPhone (less then 5 minutes) then buy a app called "3G Unrestrictor" and that's all

 

I was just going to say the same.
With a jailbroken iphone and 3G Unrestrictor youtube its tricked into thinking its connected to wifi all the time even when on 3G or Edge. So all videos would be high quality, probably a little longer to download also.

 

someone brought this up before

http://forums.macrumors.com/showthread.php?t=700675

 

I must be lucky

YouTube on my 3gs via 3G/O2 is perfect - and I don't always get a strong signal.

 

It's a balance between user experience and quality. The image quality isn't that bad, for viewing on the go.
I tried 3GUnresrictor, and I found that videos took just a little bit too long, and kept buffering, making the experience frustrating, despite the image quality.