Yes I don't think I'll be watching it, sounds grim.
I think you've handled it fine with the other child's mum.
I would be very wary even with youtube kids. There is some weird disturbing scary stuff on there, too. IME you have to go through it fairly often and block channels en masse. I am very close to just deleting YT because it's so much maintenance to keep it appropriate. Even the normal stuff like my 3yo was watching Pocoyo earlier and rather than a normal Pocoyo episode they are now churning out slop like surprise eggs to the tune of finger family. If you google Elsagate it's basically the same thing.
My guess (armchair psychologist hat) is that when he was "excited" he was actually a bit scared/nervous and was looking to see your reaction to see what you'd do/say, and then this came out in his upset when his dad shouted. I don't think it's the end of the world that you didn't react perfectly in the moment. It's quite a shocking thing and I think a lot of people wouldn't know what to do/say.
I think tomorrow when everyone's calmer I'd probably say something to him like this (although a bit more in my own voice and less like a nursery teacher!):
Seeing that video yesterday took me by surprise a bit. I thought it was a bit scary, and I'm a grown up. I wonder if you thought it was a bit scary as well? It made me feel a bit worried to know that you had seen that with <friend> because that kind of film is usually something that much older people might watch, like teenagers or adults, but it's not really meant for children. Some people find that kind of thing funny, but I don't like it. I didn't like the man, because he was rude, and I didn't like what the lady put in the sandwich. That kind of thing makes me feel all weird and wrong because it would be so horrible if that happened in real life.
Just in case you were worrying about it, it's not real what happened on that video. It was pretend blood with special effects. Those were actors and they were acting out a story. Nobody ate any glass in the sandwich in real life. I don't like that story, and I don't want you to act it out at school or with your friends. I don't want other children looking it up on the internet and being upset by it.
We have to be careful what we look at on the internet because it can contain lots of different things and some of them might be funny or silly, but some of them might be scary or worrying. I want you to know you can come to me or Dad and tell us if you see anything on the internet that worries you. You're not in trouble for watching the video, but we aren't going to watch it again and I don't want to see you playing games about that or saying "make me a sandwich", OK?
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Thinking about it, it might be worth emailing school to give them a heads up, in case it does go around the playground. If another child goes home not having yet seen it but having heard "You must watch this video it's really funny and cool" then it would be helpful for parents to have had a heads up about it so they know to expect the request. Obviously it won't help any children who currently have unrestricted access to youtube, but if parents get a note home that a craze is going around the playground to watch a specific scary video then they might be alerted to the fact that unsupervised youtube is not a good idea, anyway.