Don't want to play your Female Undead Warlock anymore because they move funny? It's okay, turn them into a way awesome Male Undead Warlock. Sick of looking at your Male Draenei? Try out something more... pleasing to the eyes. This is a feature people have been asking for since WoW launched, so I'm surprised it took so long for it to happen. If you're taking full advantage of the feature, it's really not a bad deal considering a paid name change is $10. For an extra $15, you can more or less have a new character. Well, sort of.
The first questions that I saw come up about this is the griefability, and the FAQ handled it pretty well. What if a Ninja steals your lewts, then goes and changes their identity? Well, as long as they're on your ignore list (or friends list) they can't really escape. When their name changes, those lists will be updated as well.
The odd restriction I see is Race, because I think that's one of the biggest things people wanted from this anyway. I can understand why they wouldn't want to do that, though. Your race would be the new Flavor of the Month deal. Why? Racials. You would have raiders going Draenei for the Hit aura, or PvPers respeccing their race to whatever the best PvP racial is that arena season. My fellow RPers, let's be honest. How many people on your server would be swapping to Draenei for a few months for some bizarre demon posession and/or impregnation storyline, then going back to Human or Night Elf whatever later. It would be a lot of people.
This would very quickly change from something fun to something you'd feel like you're forced to spend good money on regularly. I don't think they want that. I don't really see a problem with this service at all, I think they took a pretty classy approach to it all.
Update: It seems they're still trying to get a few bits and pieces of this working right, so I'd wait awhile before trying it out.
[Thank you to all that sent us tips about this!]