But then people could just get a list of ad hosts and modify their hosts.txt to redirect those addresses to localhost. I think there's other ways to stop this though. It doesn't seem like a huge stretch for ad providers to give hosts all the stuff to host the ad from their server directly, for example.

You mean EME? They could basically deliver a single-frame video containing the ads, text and image of the page. With some hitboxes layered over the <video> element so that when the user clicks on something it still is interactive.

.. which requires banning all existing browsers, which is something Microsoft, Apple and Google are unlikely to go along with quietly.

So, next step is DRM for webpages/content in addition to video, either you see all or nothing. The W3C is probably already running with the idea to destroy the "free" web :-)