And keep in mind that adding those new servers even in managed eviromnents can fail and fail in unexpected ways like taking out your whole network. We had this happen with rackspace - hence we moved to Amazon
As for hardware failures in general, you can afford to have some complete extra servers on hand doing nothing most of the time with the amount of money you'd save on renting bare metal instead of paying for cloud. Or if engineered properly, you'd be using all the machines at once but be able to afford to lose half of them, and failover automatically.
Yes, a cloud (bunch of VMs on a cluster) is going to be more reliable than a single machine, as you get hardware redundancy. But a cluster of machines with hardware redundancy is going to be much more reliable than a bunch of VMs on a cluster, as there's less complexity involved without the cloud stack, and thus fewer points of failure.
Public clouds are an efficiency gain for both the datacenter and the end user. The bottom line to me is more engineers are focused on operating and improving the public cloud than the state of the art managed dedicated racks from 2014.