Did they even host video and image content originally though? Vaguely remember such content was only available through external links. I think that would be a good compromise. Make it free/paid by donations/subscriptions and only host cheap text.
The move to reddit itself hosting content came much later
I suspect that the rise of imgur as it's own community was seen as a threat, or at least competition, and the question "why are we basically helping our competitors" was asked at least once.