I think you are completely wrong about that. Even at a very low conversion rate subscriptions pull in an awful lot of money. Typically my subscription income outweighs my ad income by about 5 to 1 in a given month. And my site is far smaller than reddit.
The key to this is user retention, and if reddit users are loyal to reddit (which they seem to be, especially those willing to pull their credit cards) I wouldn't be surprised to see retentions on the order of 6 months or more.
If you look at the internet as a whole, the number of $ revenue from 'subscriptions' vs number of $ from advertising, then the % is probably far lower. <1%. Also my personal experience has been that it's far far easier to make money from advertising. Especially for something like Reddit where there is little incentive for people to pay.
For Reddit, yes you'll get a number of die-hard fans who want to subscribe. But I don't believe that there is a big enough value proposition for the userbase to do that en-masse. They may as well just set up their own reddit since the code is open source (And wouldn't be that hard to recreate if it wasn't).
It might be different if:
A). Reddit wasn't spending crazy money on servers
B). Reddit wasn't owned by a multinational corporation
C). Reddit hadn't pandered to, and cultivated a staunchly
anti advertising userbase.
Right now though, it's looking like they're going to try a subscription based news service. Which fails time and time again. People don't want to pay for online news.
Also from their latest blog post, it looks like they're just spending the 'reddit gold' money on more hardware! Instead of fixing the underlying issues.
I agree that their hardware strategies are bordering on the insane, I can host much (and really, like 10 times or so) cheaper by simply getting dedicated servers with fat pipes than I could ever do using EC2, that part makes no sense at all to me. Scaling issues aside, if they ran an efficient shop serverwise I think they could easily operate the whole thing from their subscription potential. Typically you can count on between 0.5 and 2% of your users signing up for a 'gold' service, provided you give them some extra goodies on top of the free product.
The 'news' angle is a silly one, but they could definitely think up features that people would pay for that are not available right now in the free product.
The real issue with reddit making money from advertising (aside from the ad blocking) is that the CPMs that are quoted here (between 2 and 9$) are not realistic for their number of pageviews. By the time all the unsold inventory is taken out you probably end with $0.05 ECPM or maybe 10 cts per click (and that would be pretty good).
I'm really interested in how much they were paying before for their bandwidth and hosting if going to EC2 actually lowered their costs, they must have had the worst deal on the net for that to be true.
Right now, $30K / month buys you 20 (very) fat servers and 20 Gbps flat rate, managed hosting.
I'd really like to see someone make the case they can get that kind of performance out of EC2 for a similar cost.
You can waste a lot of bytes on a bar-bones design if done poorly. A couple of years ago there was a blog post (can't find it now) about a designer redoing slashdot.org using css and that redesign had a pretty large % change in size.