I just ran a couple of tests here.
G4 1.25GHz playing YouTube in Safari: slideshow, unwatchable
G4 1.25GHz playing the same FLV file (downloaded from YouTube) in VLC: perfect FMV
Now the one that surprised me, same results on my G4 700MHz.
Technically, it's not "watching videos online" at that point, and adds a bit of work if you want to watch YouTube, but the hardware can handle the video.
I assume OWB uses a similar method to play YouTube?