Blizzard has announced that they will be adding the option to "Transmogrify" your arms and equipment in World of Warcraft (source). Essentially, this will, with some restrictions, allow you to change the models of your equipment so that your helm of awesome ugliness +50 can look like the pretty noob hat +1. This is, I think, one of Blizzard's finest moves in the chess game that is the MMORPG market. Especially considering that there hasn't been an announcement by Bioware about being able to do this in SWTOR.
Transmogrification works like this: You take two items, one with the appearance you want and one with the stats you want. They have to be compatible in the following ways: Same item slot (shoulders, wrists, main hand, off hand, 2h, shield etc) and same armor type (cloth, leather, mail, plate) or weapon type (mace, sword, dagger etc). Now you can also use the appearance of a 1h item on either MH or OF slots, which is nice, but most "cool" things (like turning your epic mace into a fish, or using the "invisible" models on a couple items) are restricted. One very nice thing you can do is use the appearance of any ranged weapon on any other ranged weapon. Mad that your +1000 gun of uberness isn't as pretty as the NightElf Bow of Prettiness? Now you can swap models and keep the stats. There is also the restriction on item quality. Legendary, and common (white or grey) items cannot be transmogrified. This means no turning you mages robes into a wedding dress or tuxedo, nor have the Thunderfury model for your swords.
I'm very eager to see this, because my one big complaint about WoW is the ugliness of most armor, unless you have a set. Now you can take any of the nice looking armor sets (or even pieces that look decent together) and combine them. The net effect is not looking like you got dressed in the dark in a clown's closet. SWG did something similar to this with the "equip appearance" option. The downside to this whole thing? You have to have the item whose model you want to use. This means that anything with a "cool" model (regardless of stats) will be rising in price rapidly.
Will it be effective? It really depends on how cheap it is and how well it responds to lag. The problem with MMORPGs and unique items is that the data for items is stored in databases, usually on the player-side of the equation. That's great for items with the same stats no matter what one you look at (100 identical Shifts of Sameness need 1 item datapoint). However, if you have unique items, or semi-unique items, then you have to store them on the server-side, or at least some instructions on them on the server side. So everytime you come across someone with a transmogrified item, you have an additional server call per item.
That may not sound too bad, but I remember Star Wars Galaxies and their epic lag, especially when entering a decorated house and opening inventory. The client called the server about dozens if not hundreds of items, each with unique stats. Now SWG was not efficiently made, as it could have been designed to send the info on what models are needed and the locations of the items and then stealth loaded the underlying stats and unique item ID underneath once the visual aspects were loaded.
In terms of WoW; imagine going into Stormwind or Ironforge, especially to the auction house (and if you don't think every bank alt will have transmogrified gear just for lols, think again). You are surrounded by twenty characters or more, each having at least a handful of transmogrified items...that amounts to dozens of server calls for specific information. As long as it is handled properly, lag should be managed...but WoW has always had a lot of lag in it. The spot I'm worried about it is in Battlegrounds.
Speaking of battlegrounds; I sincerely hope that Blizzard doesn't allow the lvl 60 pvp armor to be transmogrified. Imagine everyone running around in the Grand Marshal armor set...it would get annoying very fast. I also imagine that Death Knights will keep their "reward" set from the starting area as it is very iconic in terms of DKs.
In all, this is a buff for RP, and a great idea. I just hope the implementation is good enough and there's no lag associated with it.