You have to keep in mind that an increasing portion of their time and labor is going towards moderation and filtering due to a mass influx of nonsensical AI generated papers, non-academic numerology-tier hackery, and other useless drivel.

Spinning the service off forces other the labor out onto other universities rather than leaving them to solely Cornell

Is the problem the storage cost for hosting them, the HDDs? I'm sure they can be offloaded to cold storage because most of that slop won't be opened by anyone.

Arxiv doesn't need moderation. Nobody is asking for Arxiv moderation. It needs minimal checks to remove overtly illegal content.