i am experience the same problem, when created group blogs it will install to for example to http://www.example.com/groupblog1 as opposed to groupblog1.example.com, there is a flaw in the plugin ability to create subdomains, I don’t think you can change your buddypress structure for blogs to http://www.example.com/blogs once you have chosen which path to you, to my knowledge I don’t think you can go back and change it, unless someone knows how to, I would love to know
