Providing terrific, high uptime and stable support that can tolerate DDoS, hack attempts and big traffic spikes isn't easy. Many cheap hosts run big clusters which can serve a lot of pages quickly. They can also RAID everything up and have redundancy.

Eight cores of server will fall over when you make the front page of the Huffington Post. It's like Digg, only worse!

Use of a dedicated server at rackspace can run you maybe £300 a month, that's only 6 "£50 hosting" a year websites a month you need (so 72 sites total) to break even. Surely you can get that many corporate and governemt WP sites hosted over the course of a year? Heck, add £10 to the fee, £60 a year and you only need 5 a month.

Quality doesn't always have to be costly if you know how to market and support it correctly.

Domain mapping on a WPMU installation would allow you to run thousands of WordPress sites on one installation. It's how wordpress.com works. They provide a domain mapping plugin, too: http://wordpress.org/extend/plugins/wordpress-mu-domain-mapping/

If you're going to become a WP hosting provider, you'll find this a much more efficient and cost-effective set up than managing multiple single install sites.

WordPress and WPMU will merge in the 3.0 release, but the functionality of WPMU will be retained (it has to be, right? It's what Automattic make their living out of).