CONSEQUENCE, NOT PUNISHMENT
I think the point has been missed. Death is a consequence, not a "punishment". It's not even a consequence for failure, per se (dropping a quest, for example, is failure, but you don't get killed for it).
DEATH IN A THEME PARK
But as it stands right now, I stopped playing WoW and Star Wars Galaxies because there are in fact no real obstacles to ultimate victory in either, death or otherwise. By design, YOU CANNOT LOSE at WoW or SWG. While that sounds happy and fun on the face of it, it made me realize that I was not playing a game, so much as I was experiencing a multi-user theme park.
This was never made more clear than when Sony gutted SWG's city-building system, because players were actually working to control enemy territory via fortifications and occupation. Given that the whole point of SWG is purportedly to simulate a galactic civil war, this should have surprised no one. But because these player cities were succeeding at opposing enemy players, Sony stepped in to "ensure player access to game content". The Civil War was effectively defanged, made more of a slight nuisance than any significant threat to anyone.
This means that while you cannot lose, you also cannot WIN. Your actions do not and cannot have a lasting effect on the world, because if they did, other players would not be able to experience the same content you did.
This is not to say that making a theme-park MMO is wrong or bad. They're still, obviously, very entertaining...in largely the same way any other theme park is. Disney's not going to go bankrupt anytime soon, nor will Blizzard.
So what does any of this have to do with character death? Simple: in a game where no one can actually win or lose, and the entertainment value is constrained only to experiencing content, you don't want to prevent your customers from being able to enjoy that experience. Permadeath can and will do that, and therefore it is not appropriate for theme-park-styled games, whether MMO or otherwise.
DEATH IN DYNAMIC GAMING
Conversely, we understand and accept death, even permadeath, in games where we do not have to re-experience the same content we did before just to get back to the point where we died previously. It is that uphill slog that we dread, re-doing all the same quests and farming and so forth which is unpalatable, making the game into what amounts to a chore.
Dynamic games don't have this problem, because every run through is dramatically different even when the starting point is identical. You are not repeating your experience, except minimally, so the game remains interesting. While you may initially look back with sorrow on what you lost along with your last character, this is quickly replaced by looking forward to what you're doing with the new one.
Of course, the problem here is that the more dynamic the game, the more abstract it's going to be, because every single player in the game can make the same sorts of changes you can to its world. Detailed plots would be experienced by a handful of players, and then by no one else, because the changes effected would have to be written into the game.
So for a game like WoW, which relies on providing a rich and well-written (for the most part) first-person experience, dynamic gaming is off the table and so are player deaths.
But this doesn't mean that other games, particularly those with a more abstract bent, cannot or should not incorporate player death, even to the point of permadeath. It's simply going to be a case-by-case concern.