Since you asked, yes SharpDevelop or c# in general is the better choice for this task.
But I like the challenge of doing it in B4PPC.
So I tried it myself (see LED MAtrix.zip). To get the frames in B4PPC, screen capturing is probably your only option without a wrapper for the .net wrapper for Directshow. If you decide to use Sharpdevelop see this link
.net Directshow, the samples have a demo for capturing frames. But you still have to get the stream to work/ download the file, resize and crop for your needs. But then going back to B4PPC probably doesn't make much sense, better do your analysis and communication in SharpDevelop too.
My approach also uses the screen capture method. I understand the bottleneck is the analysis performance, due to the higher resolution. So I am outsourcing the resizing of the video to the flash player itself. This is achieved by taking the video url from youtube and then embedding it in a smaller player. In my example I am using 32x32 and it works quite fast. Although I didn't test for pixel analysis yet. (you can change the resolution by changing the embedded template and the capture webbrowser)
Obviously you still have the issues with screen capturing, like no exact starting or ending time or advertising, no audio control, fading timeline and the window mustn't be covered. But my example might give you a starting point.
I also attached another file called Youtube Link Parser, it takes a video page and extracts a somewhat downloadable link to the video itself. It doesn't work with the http library/webrequest/webresponse, but if you enter the url from the textbox at the bottom into the webbrowser or firefox it will prompt you a download window and you can download the video.
Howto opperate LED MATRIX:
click the button called "Youtube" at the top right, browse for the video you want to play. Wait till page is loaded and then click the button "use video"
Edit:
If you know which videos/ animations you want to play ahead of time, you could take a quite different approach and do all the processing first and just store the data stream and send it to the LED matrix when you need it. You'll lose the feature of browsing youtube in realtime but gain a lot more control and performance and this method seems easier to implement
Edit2:
I don't know how your LED matrix is build, but if it has its own controller, is there a chance to declare it as a screen device?