The typical user must only be concerned with two numbers. The amount of Steem Dollars (SMD) they have, and the percentage fraction of the total Steem Power (SP) they own. STEEM is something that the typical user shouldn't be too concerned about. I do think that there might need to be blockchain support in the future to flag SP withdrawals to automatically convert the withdrawn SP into SMD (via the best price available in the internal market), as well as a way to automatically convert (via the internal market) from SMD to vesting SP. That way, the typical user never needs to worry about or hold STEEM, and from their perspective there is only liquid Steem Dollars (SMD) and vested Steem Power (SP fraction).

I agree the user need not be concerned with Steem, so the best thing is to get it out of the UI. Presumably Steemit has control over your account as the frontend and the blockchain supports converting Steem to Steem dollars, so surely as the frontend it can just always convert from Steem to Steem dollars for you without any need to change the blockchain?

I think you are mixing up steemit.com, the frontend, with Steem, the blockchain. Steemit, the company, does not pay any users for their content. Any tokens of monetary value being received currently are being issued directly by the blockchain.

Any money made from advertisements on steemit.com would be going to Steemit the company. I suppose they could use that money to pay users based on the statistics from the blockchain (and maybe their own internal page view statistics), but I do not think that they should. If they need the advertising money that badly, they should just use all that revenue to continue providing a great free client experience. Hopefully, they can find other monetization strategies (e.g. clearly marked promotional content like reddit does) other than regular advertising, so that the user continues to have a nice browsing experience.

Did Steemit create the Steem currency? My assumption was that they had. If that is the case then I think its fine to mix them up since their fates are very much linked. If Steem bombs then Steemit isn't going anywhere. If Steemit fails then probably nobody is going to pick up the Steem baton and keep running. I think Steemit probably should assume their role will be the primary reddit-like website using Steem as the backend and consider how they can grow Steem just as much as Steemit since the authors contributing content are relying on Steem's continuing value.

If Steemit gets popular there will be a massive pot of advertiser money waiting to be had (through whatever means - ads, promotional content, whatever) and distributed to Steemit and its users one way or another. I don't see why you would want to ignore it when it could support both Steem and content creators. I also think it would be a mistake for Steemit to monetize the content and keep it all without feeding anything back to the creators.

Maybe I'm missing something here but if there are no external revenue sources being fed into it then there is no source of growth for Steem's value other than new investment?

If Steemit bought Steem with ad revenue and transferred it to their users based on page views it would support the price of Steem (making their business more viable and valuable), provide ongoing revenue for their operations, provide additional income for their users and would even help cement their position as the dominant reddit-like Steem based website which would help avoid fragmentation and confusion. Alternatively if its a problem for legal reasons for them to pay users directly they could at least feed the money back into all Steem users by buying it.