I did experience the game with no lag, and all features on. It was a blast.
So I do know that the game works. The biggest difference between then and now is the population. I don't know what the exact problem is, and as a programmer, I understand that it could be anything. Believe me, I spent a month debugging a light bulb! Assuming the issue is population, which is natural for all games: too many people by definition means too many, should they limit the server populations?
Assumptions with no basis other than "I played it with fewer people" and it was ok doesn't work. Before the terrain patch, a lot of people were on, and it was not lagging like this.
He has stated that system resources or bandwidth is not the issue. I would like to assume that he has a better idea of what the problem is, in general, than you do based on guesses.
EDIT: I will add, I agree with the fact that the two "obvious" reasons that make sense, from our point of view would be bandwidth or system resources. So I'll give you that much. But, problems are not always caused by the obvious.