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Well, its possible, but not easy.
To start, you must be server admin or have full control of the server.. like maybe a dedicated server.
If you are using shared hosting, I really dont think you will get the access you need to auto setup subdomains.
Really depends on the host, but this is not standard.
When you do have full control over the server, you can do some stuff to automatically add subdomains and virtual hosts to your DNS network.
The scope to do that is deep.
Maybe someone else has some good ideas for this.
I would say its worth doing tho... really adds alot to a website if users can get their own subdomains.
Cheers,