One thing about Transmog (too bad WoW used that name already since it'd be a perfect name for something involving moogles) is that it might give people a reason to run through old content for missing pieces or encourage crafting of older gear. That would give some bored folks something to do and may breathe a little life into lower level crafting. That would be a plus of a vanity type system IMO.

One thing though, people will have to be willing to let go of the aversion to being /checked. If you come up wearing domaruuuuuuu (sorry) people are going to need to verify what equipment you're "really" wearing. I'm by no means a hardass, but even I would want to know what you're really using.