In my defense, even Tom Chilton made the same mistake in the interview, saying "(the Death Knight starting area uses) instancing quite a lot more... the world changes dynamically as you move through the story." This prompted Brack to interject a correction, "It's actually not instances. What we do is we have different world states, and depending on what quests you've completed, it changes what world state you're seeing." He also mentions that the new phasing technology is used in other parts and other quests all over Northrend.
Brack gives the example of a quest where a player needs to rescue villagers from a Scourge-infested town. Players who complete the quest will see the villagers they've rescued back at the quest hub whereas players who haven't done the quest will not. WoW Insider's Alex Ziebart experienced the same after doing a series of quests involving the Wind Serpent Goddess, who appeared for him in town after completing her quests. She was there only for him and wasn't visible to other players (who presumably haven't done the quest series). It's a new way to bring a new experience to players without having to load anything (such as in instances).
Think of phasing technology as several leaps beyond the Spectrecles-related quests in Shadowmoon Valley and the Intercepting the Mana Cells quest in Blades Edge Mountains which requires, appropriately enough, the use of the Bash'ir Phasing Device. Instead of items -- such as in the previous examples -- flagging a player to see things, the status of quests or other conditions determine not just the NPCs that a player sees but also the "state" of the world around him, whether structures are intact or burnt down. It's an impressive storytelling tool that makes the world feel alive and interactive. It's also immensely involving and gives the player a sense of having an impact on the world.
The potential for this technology is huge. We only saw glimpses of it in Blade's Edge Mountains, where players and NPCs would disappear from or appear within view depending on your state. Blizzard takes it several steps further and applies the state to apply to structures, as well -- whether, say, a house is intact or in disrepair. In the Death Knight starting experience, these world state changes seamlessly segue into one another through clever trips to and from Ebon Hold. This technology also allows players to experience massive events such as the charge into the Wrath Gate, which can be unlocked by completing a series of quests in Dragonblight.
This creates a unique experience for each player, but also creates some potential problems where players aren't experiencing the same world at the same time. One small example would be the change to Sylvanas Windrunner -- no, not how she looks -- currently, players who complete Journey to the Undercity will trigger an event where the Lady Sylvanas sings and all players are able to hear her song. In the Wrath Beta, players who complete the quest are the only ones who experience the song. It makes the experience unique, but at the same time, players will be disjointed from each other in terms of world events. Then again, this is the same World of Warcraft that has Kael'thas in two places at once.
Despite the incongruencies that could and do occur with the technology, the game experience improves massively. It is a technology that I don't think I've seen employed in other MMOs and Blizzard is pushing the envelope as far as gameplay is concerned. More and more, the World of Warcraft is becoming a living, evolving environment where the story pushes forward and the world changes -- and we, the players, are a part of it every step of the way.