Mike Arrington of TechCrunch has a blog post entitled Can PhotoBucket Survive Without MySpace? where he writes

There was a lot of fingerpointing, denials, and “he said, she said” going on today as everyone digested the news that MySpace had blocked PhotoBucket’s 40 million members from embedding videos into their MySpace pages.

From my perspective this looks like MySpace just found an excuse to send a big middle finger to the largest independent widget company in the hope of disrupting their ongoing acquisition talks. Om Malik sees things differently and thinks Photobucket practically asked for this blockade. Robert Scoble calls Photobucket and services like it “parasitic.” Nick Carr says this is all basically inevitable, regardless of who’s to blame.
And many MySpace/Photobucket users will simply leave MySpace and go to one of its many competitors rather than lose the ability to embed their Photobucket media. Re-creating a profile at another social network takes a lot less time than re-uploading hours of video. In the end, Photobucket could prove to be stickier than MySpace.

I agree with Om Malik that PhotoBucket clearly violated MySpace's terms of service by having ads in videos embedded on  http://www.myspace.com. I also think that the advice that Mike Arrington gives in his post will lead PhotoBucket down a bad road if they take it. The key question is whether the lock-in from a social network site like MySpace (where all your friends are) is more significant than the lock-in from having my media stored in a particular photo hosting or video hosting site. If MySpace has only blocked new embeds from PhotoBucket then I'm willing to bet that it is more likely that users will simply pick a new media hosting provider (e.g. YouTube for videos, Flickr for photos) than that they'll switch to Facebook or Windows Live Spaces because they are too tied to PhotoBucket.

If I were PhotoBucket, I'd work with MySpace and either (i) agree on how MySpace gets a revshare of PhotoBucket ads shown on their site or (ii) make it easy for MySpace to filter out the embeds with ads (which are a minority) and allow other embedded media from PhotoBucket pass through. Considering that they are trying to flip their startup, the PhotoBucket crew would be wise to avoid going to war with the biggest traffic driver to their site.