I just picked up a second one of those peeps (from your TOTW link) at Dixon's last weekend.
And I agree with your assessment. The one I have in use, I drilled out the hole a little bigger (not much though, there isn't much "meat" above the existing hole.
I use my current one with a fiber optic (traditional style) front sight sold by MBS
(MBS Fiber sight)
I'm going to try pairing the one I just bought with a very thin bladed (silver on copper base), again with the peep hole enlarged as much as possible.
I agree these are not the best/most functional peep on the market, but they do preserve the look of a more traditional sight - at least until you get really close.
They do work well enough that I bought a second one for a current build (for personal use), but if you are looking for pure functionality without any care for "historical looking", you would be better off with a more modern sight.
I would even suggest the fiber Tru-Glow sights marketed for Win 94's, 336 Marlins - they fit the same dovetails as most traditional sights.
I have a set on my Win 94 and they are awesome.