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The thing to remember is that loot distribution is key to the replayability of the game, and hence Blizzard's continued profit. Uncertainty of reward (the slot machine principal mentioned up thread) is a key part of that. If you look at the progression of loot allocation in the game, Blizzard has consistently created *more* ways of handing out shinies.
WoW 1.0 loot sources:
Mob drops
Quest rewards
Wow 2.4 loot sources:
Mob drops
Quest rewards
Reputation rewards
Token drops
Badge rewards
Pvp "currency" rewards (honor/arena points)
I wouldn't be surprised to see some developments in Wrath of the Lich King, but I think you'll see a continuation of the same trend: a combination of immediately usable "jackpot" style rewards (standard mob drops for example) and "earnable" items that offer fractional rewards for time spent even when the RNG doesn't go your way (faction rewards, badge loot). You can mock the badge system for making the game "world of casual craft" but it does allow Blizzard to offer rewards in very flexible ways (think of the badges of justice that sometimes randomly pop up in SSO goody bags).
I think there's certainly scope to develop the badge system in a way that rewards raiders. The vendor could sell items that would require badges plus an instance drop. Or maybe the instance drop item would reduce the price of the badge reward (so for example those bracers would cost only 30 badges instead of 60).
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