I just don't see how R'lyeh can function in even the medium term with a much faster population crash. Unlike Ermor, they have to spend gold on their commanders (280 each for non-sacred Starspawn mages). Add to that, apparently their not-so-free-spawn cost upkeep. Played the normal way (awake Dom 10 god, building temples as fast as they can, etc.), they will quickly cripple themselves economically.
Heck, I'm in the mid-game as R'lyeh in an MP game right now, and as it is I haven't bought a new Starspawn or Illithid in at least a dozen turns, as already more than two thirds of my income is devoured by upkeep! If my population
really started to die off, I'd be FUBAR.
Yeah, in my current game, I'm a dangerous faction. But as others have mentioned, this is where diplomacy comes into play - there's already a coalition built just to deal with me.
The point is, if R'lyeh's population dies a whole lot faster, it will require a completely different style of play. They can't just ignore it, and burn gems and the occasional lucky gold strike like Ermor. They'd have to play a lot like Mictlan (except with a lot less control, with no blood sacrifice available), restricting their crappy dominion to their capital and surrounding environment.
Outside of their lethal dominion, they'd have to play like MA R'lyeh, except they'd have to do it in whatever crummy enemy dominion they happened to be in. "Free Spawn" would become a totally minor part of their game plan - just something they scrape up from the 'dead-zone' that is their capital.
LA R'lyeh will have to 'nerf' it's own Dreamlands fun, just in order to fund it's own existence. So that would mean a lot less random void-beings, many fewer free cultist commanders, and a whole lot less INSANITY - all the things that make LA R'lyeh such a fun race to have in the game. Basically, it would wind up like a gimped MA R'lyeh.
Oh well, just my two bits. Maybe I'm only griping because I'm worrying that the next patch will totally kill me in my current game

I just wish there was another way of cutting LA R'lyeh down to size (that didn't involve cutting it's head clean off!).