Yes it does. Free or not, what RTB rules over much of the modding community, all of the in-game communications department, and has its grips in what is surely more than half of all servers hosted at any one time.
Competition would allow users to have more influence on what is added to the mod, which I'd support.
I don't think competition will ever exist, just because RTB offers file hosting as part of its web services. Most people wouldn't pay money to run a mod they couldn't easily profit from.
It's not competition and you don't understand what competition is. Traditional economic concepts don't make sense in the context, because using RTB is not exclusive over using other mods, RTB is not for profit, and market share isn't especially relevant. It makes no difference if RTB has10 users or 30000. There is a point where Ephialtes will decide the cost of hosting and time on development isn't worth it for the number of users using it, but it's not a specific number and it's entirely up to Ephi to decide.
RTB isn't a business. If a mod with some or all of RTB's features came out, RTB wouldn't look to provide incentives for users to stay. If it was a bad mod, RTB would maintain development with no changes. If it was good, RTB would either expand into new, non-overlapping features to provide more utility for Blockland users, merge, or discontinue. Ephialtes has said himself that he would consider content and patches submitted by users if he decided the quality was good enough. Surprise, nobody's contributed anything yet.
I don't want to derail the thread further so if you still don't see why Blockland mods don't really compete, feel free to PM me.