The current flashcard format - which was designed around the storage capabilities of mid-'00s Palm Pilots! - doesn't really track enough data to make merges viable; for example, flashcard histories are not logged with dates (so no way to combine them), objects aren't assigned any sort of GUID that would make it possible to determine whether two objects were actually the same or were simply newly created objects in each database with overlapping rowids, not all objects have independent modification dates to detect changes for a sync, and deletions are not logged at all. We've addressed all those problems in the new format for 4.0, but there's not really an effective way for us to do database merging with the old format.
I do think we would host this on our own servers, yes - even ignoring iCloud, we need something cross-platform both for dual-platform users and for the (quite common) scenario of people who replace a broken iPhone with a new Android phone and no longer have any iOS device from which they can restore the data from their iCloud account. (we would probably charge a nominal fee for online sync/backup, though)