Does this include sites hosted on Google Drive, Google Spreadsheets (yes, you can host a site on Google Spreadsheets, by putting HTML in a cell), Google Docs, etc.?
I see, but I assume Google has custom ranking since I never see them show up in any search result, they clearly aren't getting Google.com's rank score.
Absolutely. Subdomains may get some extra credit, but they still need incoming links. "Leased" subdomains and directories don't come naked, they usually get lots of links from the main site, often site-wide in header/navigation, sidebar or footer.
Since the publishers get paid for leasing out the subdomain and linking to it, you could argue that they are essentially selling links. That's apparently not what Google is saying though, because they'd penalize the sites selling the links, too, and only the leased out subdomains/directories have been affected, the rest of the sites are still ranking as they always did.
