When I was growing up I lived on an air force base. It was a little self-contained community with lots of places to go: Burger King, the bowling alley, the library, the gym, the commissary. Before I could drive, I walked everywhere with my friends. Starting at one end of the base and walking to the other end would take about an hour. You could hit all of those locations in less than two hours total. It wasn't that big of an area, honestly.
If you look at a game with a seamless world like World of Warcraft, it takes me less than fifteen minutes to walk from Orgrimmar to Thunder Bluff. If you start in Darkshore and run south to the tip of Tanaris, or start in Tirisfal and run south to Stranglethorn Vale, you can probably make the trip in under an hour. Significantly under an hour if you have a mount. A lot of that time will probably be spent navigating around mountains and other barriers. What I'm trying to say is this: Does it seem appropriate that the entire continents of Kalimdor and the Eastern Kingdoms are smaller in size than the single tiny air force base where I grew up?
It works fine from a gameplay perspective-- after all, like Shannon said, you don't want to be running across a seamless world with proper scaling. Vanguard tried to do proper seamless scaling (at least better scaling) with mixed results. Some people think there's just too much land mass there, and some people like it for how huge it feels. While I admit that I'm in the latter camp, I can understand the complaints of the former. Honestly, if there's not something to do with all that space, it's just wasted space. But don't you lose something when your whole game world is smaller than one small town?
I think so. The zone shifts in WoW are especially glaring when it comes to immersion-breaking transitions. Having a seamless world is well and good, but it's weird to step from a desert into a jungle or a forest into an arctic wasteland (why is Winterspring covered in snow when it's actually just east of Felwood?). The worst of them is probably the zone line between Thousand Needles and Feralas. It's like, "Desert valley... valley... valley... BAM tropical forest." Check out that screenshot to see what I mean. As much as I hated zoning in EverQuest back in the day, it was really just because it took so long. This was on a dial-up modem, so it was sometimes a several minute process. These days zoning is usually a simple 15 second break where you can literally watch the loading bar shoot across the screen. In many ways, that can actually be beneficial for players.
Loading screens can create the illusion of vast expanses of land traversed and make it seem like there's more of a buffer space between zones than there really is. Furthermore, the screens provide a mental transition for the player. There's a clearly defined line where the area you're in stops, and you get yourself ready for the next zone. It's not just running from a jungle to a desert to the arctic in fifteen minutes. Your mind has a chance to switch gears. "Okay, so I ran through a desert. Loading... now I'm in a whole new zone. I must have crossed a decent amount of distance." As Shannon mentioned, it just feels better in the cases where your game doesn't require massive amounts of travel time to actually cross zones.
There's also another reason why I like zoning compared to seamless worlds: It becomes much easier to add new areas to your game, allowing the game designers to have an easier time sticking new content in old places. You don't need to restructure your dungeon to add another level to it or to put all potential zone entrances in ahead of time. Want a new area? Simple, just turn that empty cave with the dead end into a new zone line. Make that corridor that didn't go anywhere into a new wing of the dungeon (EverQuest did exactly that when they implemented Sol C and Jaggedpine).
Still, I have to admit there's a part of me that's attracted to the idea of doing a seamless world with proper transitions and just giving lots of ways for players to move quickly across the vast expanses to the content (or just make sure there's something to do with all that space). Spending the last few years in WoW has made me a lot more comfortable with the concept than I was initially, and I think Vanguard was definitely headed in the right direction. There's a lot to be said for stumbling over a huge cave system while you're exploring a giant forest-- this is what adventuring is all about, right? Small scale zones make for limited exploration opportunities.
So what's the final decision? Do loading screens between zones help or hinder your game immersion? Personally, the answer to that question is going to depend heavily on how the rest of the game is designed. If the the world is supposed to be massive with lots of transitions between wildly different landscapes, sign me up. I want them. It will feel much bigger for it. If the landscape is fairly similar or the transitions between zones aren't that striking, count me out. In that case, they're a nuisance. The Lord of the Rings Online is a good example of this, I think. While it's been criticized for many of the zones looking similar, that's a case where I feel that the zone transitions are handled very well.
Either way, the ultimate goal of this design choice should be to make the world feel right. There's a time and place for both of them.