Most likely yes, but if you find a good hosting company and multiple people who are willing to work with you I think his idea will succeed.
That makes no sense. $1,000 will get you enough power in your server to run two minecraft servers and one web hosting server, if you're lucky. You need at least $5,000 per server to start, and that still isn't much compared to what even the smallest of hosting companies have.
The Lenovo ThinkServer is popular at my buddies business office he works at. They prefer it because it is very flexible and you can often find racks on discount, as well they're easy to set up. He had a CS:S server on one of them when they allowed their employees space for a small fee and there was no noticeable lag on the 100 tick, 32 man server.
Look into getting more than one, though. You want to separate the game servers from the web servers, et al. Also you want to be able to separate peoples servers to reduce latency and bandwidth issues so they get quality.