As mentioned in other posts, the trend tends to be that more money can be made from ads than subscriptions. However, it is good to have both as many people hate ads.
I suggest they just yank that band-aid off and start up their paid service. Sure, people will scream, and leave. However, that is no reason to deter others from coming. How would you react if someone said 'Game X sucks because they make you pay, and it used to be free'. Most wouldn't care and try it out.
When my friend and I launched UrbanLegions.net, we made sure our beta/free period was short. Like your friends, the game is fully playable as free, but you don't have ads and get more features if you subscribe. However, just from past experience, like reading this article, when it comes to money, you have to embrace your revenue setup from the start, before you start getting a big following.