You paint a very pessimistic picture for smaller hosters. However, I would disagree that the small host is doomed.
If you play the same game as the large hosters and talk the same talk, then a customer would most likely go for the lower pricing and higher specs. But if the smaller host can differentiate themselves and provide good customer service then I'm sure they can win loyal customers. The last thing a customer wants to do is to continue to transfer from one host to another.
Also, you assume that the large hosts offer good customer service. I have not found this to be the case in my experience with large hosters. You may get to talk to a warm body (after being on hold), but that doesn't mean you get support.
Finally, you are right that large hosts may have deep pockets to out advertise the smaller host. But that doesn't mean that they are spending money wisely or efficiently. If you play the same ad game as the large hosts then they will beat you, but your example of google and overture are not the only places that a small host can advertise.
Basically, the smaller host has to outsmart the larger hosts to survive.
DiscountASP.NET
http://www.DiscountASP.NET
The Power of ASP.NET for Less