In general, we want to show the highest-quality video we can. But if something isn't watched for a long time - because the vast majority of views are in the beginning - we will move to a lower quality video.
We bias to higher quality (more CPU intensive encoding and more expensive storage for bigger files) for creators who drive more views.
Quality seems to be much more important to the original creator, who is more likely to delete the video if it looks poor, than to their viewers.
The performance system works at an aggregate level, not an individual viewer level... It isn't huge and viewers appear to care more about video content over quality.
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