Is it really so bad? A bit more verbose but also more readable, can be plenty short and sweet for me. I probably wouldn't even choose Python here myself and it's the kind of thing shell scripting is tailor-made for, but I'd at least be more comfortable maintaining or extending this version over that:

  from subprocess import Popen, PIPE

  CMD = ("printf", "x:hello:67:ugly!\nyy$:bye:5:ugly.\n")
  OUT = "something.report"
  ERR = "err.log"

  def beautify(str_bytes):
      return str_bytes.decode().replace("ugly", "beautiful")

  def filter(str, \*index):
      parts = str.split(":")
      return " ".join([parts[i-1] for i in index])

  with open(OUT, "w") as out, open(ERR, "w") as err:
      proc = Popen(CMD, stdout=PIPE, stderr=err)
      for line_bytes in proc.stdout:
        out.write(filter(beautify(line_bytes), 2, 4))

I would agree though if this is a one-off need where you have a specific dataset to chop up and aren't concerned with recreating or tweaking the process bash can likely get it done faster.

Edit: this is proving very difficult to format on mobile, sorry if it's not perfect.