It hasn't held them back. I wonder if it's a case of their services been so unique, cheap, competitive, etc. or if we overrate design and it's not really that important. I tend to think it's the former, but it's an interesting example.
My issue isn't so much with design but rather the fact that you have to register a new account with them every time you want to use a new service. This is almost certainly legacy complexity from the days that these services were not exposed through API's, but it is still a pain in the ass.
I was working on something similar to this (sorry, no showcase). There's a jQuery extension included for working with contentEditable text selections and formatting text with tags. I think it does a better job with overlapping tags and it merges anchor tags with same hrefs correctly. It does not work on IE < 9 (I think IE9 supports the gecko contentEditable api). You might find the code useful .
Isn't the point of this approach to be _difficult_ to switch back and forth? Next thing you know there will be a chrome extension that swaps your hosts file and you will be separated from procrastination by a single click.
I found it useful to force myself to manually comment/uncomment lines in my hosts file. It gives a critical few moments for a bit of humiliation to set in, as you realize how desperate you are for diversion. On the other end, it gives a moment to mentally pat yourself on the back for eliminating the distractions.
It's silly how this is actually becoming the truth. People use the same password and different usernames for different sites. In the end, remembering your username becomes the problem :)