There has been much concern over how YouTube will be functioning on Windows Phone 7. Fortunately this video, recorded at PAX 10, actually goes quite far to answer the question.
If one fast forwards to 3:30 one can see the user attempting to play a YouTube video, and being prompted to download the YouTube app (revealed here as a Media Hub Add-on).
While this solution of course works for the biggest video service in the world, a more general solution will have to wait for either an upgraded browser with HTML5 or Adobeâ€™s Flash solution.
Thanks Jin for the tip.