I agree with everything.
There are distinct SEO advantages to both methods. If you place twenty different blogs on twenty niche-specific domains, you may pick up some extra love due to keywords in each domain. However, you can build internal page rank by having a single blog consisting of hundreds of interlinking pages.
I couldn't tell you which method is more likely to create more traffic/sales.
You're gonna get varying opinions on traffic sources. I'm not a type A link exchanger. I don't seek links from other sites and don't enjoy that part of the business. I'm a type B guy. I prefer to work in the shadows and link to my new projects from my old projects. In other words, I like to build my own traffic whenever possible. I also _believe_ that you're better served by linking to one of your sites or niche-specific pages from within a chunk of your own SEO text than swapping links with a stranger's completely whored-out site. In other words, if you're blogging about some pretty little cocksucker in a blowjob post, and she just happens to have a nice set of big natural tits, it's worth the 3 seconds of effort to link 'big natural tits' to your big boob page/boob category/post about large natural tits.
Lather, rinse, repeat.