To buy physical hardware equivalent to that instance, yes, it would be cheaper. However, you need to also factor in the costs of keeping that machine in a rack for 3 years with power and cooling. When I worked out the costs, it ended up being cheaper to use EC2 by about 30%. My datacenter was a bit expensive, but that is because I was looking at datacenters in San Francisco, since I don't want to have to drive to the middle of nowhere when I have to do maintenance on the physical machine.
Also, I was comparing against 1 year reserved instances, which is what I use now.
If it's not a commercial secret, I wonder, are sites like Reddit and Digg low margin businesses, or are hardware/bandwidth costs a tiny speck compared to the ad revenue generated?
In your "IAMA" thread on reddit, someone estimated that Reddit must be pulling on the order of $1M per month, making the costs neglibile. Digg must be earning even more, because of its greater number of users and their higher susceptibility to ads.
I'm not at liberty to discuss reddit's revenues, but what I can tell you is that the entire operational cost of the site (about $15K last month) is small compared to the human cost (ie. salary and benefits)
Also, I was comparing against 1 year reserved instances, which is what I use now.