You are correct that iPhone doesn't support flash, but Youtube definitely works on it. A Youtube app comes pre-installed on the iPhone and you can also use the mobile site, IIRC.also the Iphone does not support flash, ie no you tube or most of the other internet video, where as droid supports flash.
phones. that will be the best bet.
I've never used the Droid, so I'm not going to tell you which is better. But I love my iphone and would buy one again in a heartbeat.