For whatever reason they want to serve arbitrary sizes on the fly. They do mention cloudfront in their future optimizations section, but complain about the price of CDNs in general. Cloudfront looks awfully cheap unless I'm missing something.
And speaking of cheap, Cloudfront is as close to free as S3 itself. It will roughly double your S3 bill, leaving you paying a grand total of $8.04 per month for your image hosting on a ~1,000,000 unique/month site. Remember the 90's when that would run you $400/month? It's so cheap that it's not worth calculating. Just flip on Cloudfront, configure your CNAME and get on with your life.
The primary advantage here is that you don't have to coordinate generation of new images just because someone, somewhere requires a specific size in some client of your image system.
Of course, just stick a CDN in front of your on-demand scaling implementation, potentially backed by S3, and you're done.
Cloudfront is really enticing, though. For a cheap CDN, if we really had the need, we'd probably migrate to cloudfront, then come up with a task to batch resize our S3 images, then stick them back into S3. This could probably be done on a one-off task on ec2 by spinning up a few instances, or even with Hadoop.
If anyone's taken this approach, I'd love to see it!