Actually, seen from a different perspective, this could be good for the small teams. I mean, look at the team that get's drawn against Liverpool in the 1st round. They'll have the European champions playing a competitive match against them, and that could mean a great deal for a club from Bosnia, Malta, Cyprus, Estonia etc, in means of marketing, TV rights, attendances, not to mention the "honour", the chance of playing the best of the best. Sure, the match would most probably mean they'll be eliminated straight away, but let's face it, when was the last time a team from the 1st round actually qualified?
Same goes for the team that gets Liveprool in the second and third rounds.
Actually, this isn't a bad solution IMO.