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The 1vs1 pvp is a good idea and im sure they will implament it in DL as it is in PL and SL already.
People watching the fight and betting has been brought up on past threads in SL. Devs consider it a type of gambaling and dont condone it.
All in all its a great idea just dont think devs will go for it.
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I've already suggested something similar to this however it had nothing revolving around the Arena. It was just a duel system with title benefits. however unless I'm mistaken, It was taken off the forums by a moderator as I can no longer find it, So by saying that I hardly doubt this will be considered, Not trying to flame just stating that most of what's said here has been suggested already.
However gambling on a fight to win X amount is a little imbalanced if you ask me as you can find someone to farm you X amount of gold from X amount to begin with.
With gambling said, It was suggested that casinos/slots were implemented to place money into and win back(if you desired) I like the thought of it however you need to check forums for similar post as most of what's in here has been brought up before from end-gamers that have not a lot of things to do these days but burn energy to farm pink gems and sell them then log out and onto SL or PL, Just set into a different format and much clearer and readable text with "game mode" as the title :P