2) Do you not enjoy features like the web interface and public links? Those are one of my favorite parts of dropbox and they wouldn't work with client-side encryption.
You can have web interface with client-side encryption. Check aes.io (plug).
I was assuming that an employee account can in a more or less direct way access user files. Either way, it's not the first time they've been compromised and last time[1] client-side encryption would have certainly helped.
> Do you not enjoy features like the web interface and public links?
The web interface could work with client side encryption. I wouldn't mind having no encryption for publicly shared files.
[1] www.wired.com/threatlevel/2011/06/dropbox/
If we assume that the set of files users sync is similar to the set of files in their home directory then it is not a stretch to conclude that Dropbox deals with lots of music. Dropbox cannot do anything about the documents or family photos but they can save considerable bandwidth and disk space by deduplicating the music, or any other common media.
Since dropbox's biggest input cost is storage I could well see client side encryption having a consider effect on their profitability.
There are several systems with client side encryption, some of which also have de-duplication, and at least one of which has interesting crypto (bitcasa).
This is all unrelated to the authentication problem with dropbox today, though.