The biggest downside is bandwidth. There would be no reasonable way (that I can see) for a host to cap bandwidth on any data that they hold. So they could potentially be required to serve the data 24/7 indefinitely. I suppose this is workable - it mainly just means that hosts will have to take into account their bandwidth limits, and only host that space accordingly.
That sounds like an argument in favour of dropping a block once it has been "verified", as then the host knows it will only be downloaded once, either by the "verifying host" or by the actual customer. That would also bring back paying more for more copies, because unless the customer specified, and paid for, two copies there would just be one copy of each block floating around (probably plus one insurance copy the market/escrow has in escrow) unless the customer paid to have it downloaded twice, in which case after it has been "verified" the host who had it could keep it, waiting for a second download.
However since your argument is basically a storage-provider-side reason why the provider might want to drop off the list of hosts the block is available from we might as well leave it to them to choose for themselves whether they want to drop the block due to having already spent quite enough bandwidth on that block.
This is starting to sound more like paid torrenting than anything.
Hmm, I am not really very familiar with that. But if it offers us a market for our service by all means lets explore that.
Usually torrenting tends to imagine the blocks are going to be sought by more people than just the original uploader, right? So hey, if there is a wider market for blocks than merely selling them back to their uploader, and the uploader is willing to provide keys for decrypting the data either to our system / the storage providers (to enable selling the data in useful form) or to other end-users (in order to make the uploader some money to cover the cost of having our system store the blocks), great. More money for the service and maybe also for the uploader(s).
-MarkM-
EDIT: Also, if providers do not know until later whether thousands of people are suddenly going to offer to buy copies of certain blocks, holding some on speculation might be encouraged, since any block might turn out upon release of decryption keys of the file it is a block of to be very popular / in demand.
EDIT2: We could go even further, constructing files whose decryption does not require all previous blocks to decrypt a block, so that someday keys can be released for any specific block, revealing that specific block to be very valuable / popular in some way.
EDIT3: For example we could habitually insert into our files a block containing a bitcoin privkey. Someday, maybe quite some time after the pool-hopper types have long forgotten that block, we could release a key allowing anyone who retained that block on spec to decrypt it and get those bitcoins...
EDIT4: We could also have lotteries, such that each time a bitcoin blockchain block reaches a depth of 120 some deterministic function computes some number of what could maybe happen to be block-hashes, or certain numbers of bytes of some block-hashes with the number of matching bytes being related to some lottery-winnings-distribution setup... If, of course, one does in fact still have a data-block that is at least 120 blockchain block-cycles old that matches...