The economics don't make sense, each video is stored ~ once (+ replication etc. but let's say O(1)) but viewed n times, so server-side upscaling on the fly is way too costly and currently not good enough client-side.

Are you considering that the video needs to be stored for potentially decades?

Also shorts seem to be increasing exponentially... but Youtube viewership is not. So compute wouldn't need to increase as fast as storage.

I obviously don't know the numbers. Just saying that it could be a good reason why Youtube is doing this AI upscaling. I really don't see why otherwise. There's no improvement in image quality, quite the contrary.