On Voyages in Eternity, Damionov reposted an idea from the mud-dev forums which proposes an alternative to the XP mechanism for advancing levels. The idea involves moving characters along in levels by accomplishing "achievements." I think Dungeons and Dragons Online attempted to do something similar by rewarding XP based on completing quests as opposed to the mindless killing of monsters.
Its a nice idea, but I don't think it really fixes anything. In my humble opinion, the main problem with MMORPGs is that the leveling mechanism is broken. It makes great sense in a single player game since it gives you a sense of progression. In an MMO, however, it also segregates players as players of different levels can't play with each other.
The leveling mechanism in most MMOs also reduces the attractiveness of the game as it matures; most MMOs attract the majority of their players when they first come out. Mature MMOs end up being empty wilderness devoid of players except in the highest level zones after some time. In EverQuest II, they introduced many low-level zones with Echoes of Faydwer. They are mostly empty. I rolled an Arasai and took him through the new starter zone they recently introduced in GU35. Its pretty much dead. The game simply will never have the population it had at launch in the low-level zones. And as they add more low-level zones, like the upcoming Sarnak starting area, the already low numbers of low-level players will be further spread out.
Most people I know hesitate to join any MMO that is already established for this very reason; its just a very lonely experience to jump into a game where you don't know anyone, and there is no one to play with you since they are at the end game already. And its not as fun to explore when everyone else already has walkthroughs or has done the quests you are on already and wants to get through it in the most efficient manner possible.
Raph Koster recently went into detail about these and the many other reasons why levels suck on his site, and I would recommend reading that.
Recent MMOs have tried "hacks" to fix the broken leveling mechanic. City of Heroes and EverQuest 2 introduced mentoring systems so you can temporarily change levels. I rarely see it used in EQ2, except to "cheat" by mentoring down before zoning into scaling instances (so the monsters in the instance will be set to a lower level than usual.) I saw it used quite a bit in CoH, so I guess its a success there, but its still a duct tape patch on the problem.
Dungeons and Dragons Online has a flatter level range (a lot of advancement is done "within" a level) and rewarded XP for quests instead of grinding monsters. But the inevitable result was that players grind quests instead -- Kanthalos talks about some of the issues with quest-oriented advancement systems on his site. So that fixed nothing.
So what can we do? Can we just eliminate levels? To do that, we first have to understand the purpose they serve in terms of the game mechanics... Levels serve a very important purpose: advancing your character is what motivates players to keep playing. If you eliminate levels, people would require a substitute as a goal. In games like EverQuest, the primary motivator to keep playing is to increase one's level. At the level cap, the motivation is channeled into item acquisition, which is simply another form of leveling mechanism.
So the question is: is there a way to change or replace the leveling mechanism so that it doesn't segregate players, while still providing an incentive to keep playing? I think so. We've already seen this done, to some extent, in a few games:
Vendetta Online avoided some of the issues with leveling because its combat model was twitch based. Levels merely gated content so the "better" ships were out of reach until you "earned" them. However, a new player in the starter ship could take out a veteran in the "best" ship in the game if he played better. So, new players still can find roles to play on servers where the majority of players are at max level.
Guild Wars largely avoided the problem with levels. While they did have a leveling mechanism, you got to the level cap quickly - you could do it in a day. At that stage, the primary motivator in the PvE game was to accomplish missions, collect Heroes, and obtain skills. The skills did not necessarily make a player "better;" instead characters simply became more specialized, so a new level 20 could still play with a veteran level 20 and pull his own weight.
That's what I'd like to see more of. I'd like to see leveling replaced with mechanisms to allow a player to earn the ability to customizer their character, or specialize the character in ways that doesn't forcibly segregate them from the rest of the player population. But I'm no game designer, so what do I know. :)