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I think the reference was to IE4 for Windows 95 and 98, which did in fact run the desktop and file manager functions with IE to enable web functionality. You could type a URL into the file manager path bar and use it as a web browser or use a web page as your desktop, IIRC.
Most of the formats served by YouTube are already chunked, which means they can easily insert different chunks of video (ads, etc) at various points in the stream by changing the manifest. This is trivial, computationally. The complexity lies in building the mechanisms to make it work.
The non-chunked formats are only used by older devices, and are lower quality. Those would require re-encoding to change, but few users see them anyway, and those users probably don’t adblock.