H.264 is a far superior codec to Theora. For a large site, distributing video in Theora would significantly increase bandwidth costs, and would hurt user experience.
Would it hurt user experience as much as not having ads or never being able to charge for accounts? Because that's what using the free version of h.264 implies.
I don't disagree, and I'd love a free open-source video codec that compared favorably with H.264. I wouldn't be surprised if we have one soon. But we don't yet.
I would be surprised, actually. With vague software patents covering nearly everything related to video encoding ("Method for the computation of the sum of two integers"), it's a legal minefield. If people could freely implement their own ideas, then we would definitely have something better. But thanks to software patents, this is not possible.
Would it hurt user experience as much as not having ads or never being able to charge for accounts? Because that's what using the free version of h.264 implies.