Baked in ads run counter to googles entire ad philosophy though, to say nothing of the technical challenges that poses. Googles big selling point right now is targeted ads where the ads they serve you are based on your activities that they've tracked. With baked in ads every viewer of that stream gets the same ads, so while they could traget ads based on the contents of the stream, they would no longer be able to target the ads at specific viewers.
There's also the problem that baked in ads are in many ways actually easier to skip. There are already extensions like sponsorblock that can skip specific segments of videos, and if it's not served as a separate stream it will be more difficult to give special treatment to the ad portion of the video.