I do notice that a lot of "big sites" that "kind of" let you have a blog (like fox sports, for example) are not only subdirectory structured, but buried a few levels down as well.
To me, it's all about the end user experience. That being the case, having their own subdomain seems to "make them feel more special" than just being another directory on your site.
If you're "compensating for other things that are lacking" with google PR juice, then, as it was said above, subdirectories would be more to someones liking.
However, you have to know your target audience too.
Do they really care, or do they just want something to call their own?
Why do users seek out free blogs? It usually is one of 3 reasons, although there can be others as well.
1) They don't have a clue how to get a domain, a host, and set up their own.
2) They don't want to pay for it when they can get something for free.
3) The site they are joining is a large community, of which they wish to be a part of. (Rare for a lot of MU installs out there, but we're not just talking about MU.)
Sure there are other reasons, like they're friends did it or whatever, but those 3 things are the most common overall.
At that point, do they actually care (or have the knowledge to care) how they're site is accessed? Probably not, but depending on how you market your structure can go a long ways towards how those who could care less otherwise would feel.