The digg exodus didnt happen overnight, I agree. But the v4 was the final nail in the coffin. It really started around the time digg banned anyone posting the DeCSS key. A lot of users started trickling away or splitting their time between reddit and digg. Reddit promoted itself as a free-speech platform at the time. Reddit self posts got posted to digg more often and more digg users came to reddit. After v4 there were some new accounts but actually the trickle had been going on for some time.
Whilst digg changed functionality reddit is trying to change its ethos, something that is much more dangerous than changing functionality. its ethos is what brought users in and people are more likely to leave because of changes to the fundamental ethos of a site rather than the functionality of the site.
I don't think most of reddit's content creators care one iota about freedom of speech.
Most people are used to vBulletin/phpBB/etc. forums that are strictly moderated. Besides, while the admins might have previously held a hands-off attitude, the subreddit moderators don't. Most subreddits have strict requirements for what can and can't be posted to them; go look at the sidebar of a big default like /r/pics or /r/askreddit. In this sense, reddit is far more restrictive than Digg, which just had a handful of site-wide admins (again, Digg had nothing like subreddits) enforcing a small amount of rules.
I can tell you right here that most of the people posting cat pictures to /r/aww, memes to /r/adviceanimals, discussions on /r/askreddit, etc. couldn't care less about their freeze peaches. They're not posting their cat pictures to /r/aww because of some mythical commitment to free speech; they're posting their cat pictures to /r/aww because that's where people post cat pictures. And the same goes for people who post to smaller, community-oriented subreddits: they're posting to these subreddits instead of various forums because they can reuse their existing reddit account and the subs are easily discoverable (Are you a fan of something? Then put an /r/ before it and you'll probably find a subreddit dedicated to it!). Probably the single biggest barrier to posting on forums is having to register a new account for each forum, and you don't have to worry about that on reddit.
In fact, "free speech" can be a detriment. Lots of people were turned off to reddit when Anderson Cooper brought /r/jailbait to the public eye. People who could've been posting cat pictures to /r/aww instead hesitated and said "nah, I'm not gonna post this to the same site where people post sexualized pictures of children". I'm active in some IRC channels, and whenever reddit comes up, I always have one or two regulars saying things like "reddit is a shithole because they allow /r/coontown and /r/picsofdeadkids" (VERY VERY NSFW do not browse at work).
For every freeze peaches zealot lost when /r/jailbait was banned, they gained a dozen more users who didn't want to be associated with borderline child porn. If most people cared about freedom of speech above all else, 8chan would be the most popular site on the Internet. But instead, 8chan has a reputation for being a cesspool, and admitting to being an 8channer is a good way to become a pariah.
I think a fair amount of people were perfectly fine with the company promoting free speech, while also encouraging heavily moderated subs like /r/askscience. the two preferences dont conflict at all.
Whilst digg changed functionality reddit is trying to change its ethos, something that is much more dangerous than changing functionality. its ethos is what brought users in and people are more likely to leave because of changes to the fundamental ethos of a site rather than the functionality of the site.