Based on my experience with X-Com in the late 90's, seeing how different strategic choices influence the outcome is the fun part of the strategy game. In some ways, "losing" the game meant a fresh start where you could try a different approach to combating the alien invasion. The penalty for failure was only a penalty if you did not like the game that you were playing.
Meanwhile, as I've written for a long time now, all death penalties in MMO's can effectively be expressed in terms of the time it will take to get your character back to the state they were in prior to their unfortunate mishap. Whether it's the time to run back from the graveyard, payoff exp debt, replace lost gears and levels, or even to re-roll after hardcore perma-death, there is always some quantity of time that will repair your losses.
The difference between Tobold's bygone era, where this threat brought communities together, and today is a more diverse playerbase. In an era where the predominant form of play was grinding mobs in a group of your friends, the loss of exp just meant more time grinding mobs in a group of your friends - i.e. only a penalty if you did not like the game you were playing.
Today's genre attempts to draw a wide range of playstyles, such as solo players, small groups (who may not have tanking/healing), structured groups, raiders, crafters, etc. More to the point, developers are increasingly using incentives to get players to use the other forms of content, as they cannot afford to let the development time used to support all of this stuff sit idle. The result is that, if you were to lose gear or exp as a result of death, you would probably be forced to go do something you do NOT enjoy to get it back. Having to spend an hour to re-queue and repeat a dungeon finder PUG that failed is arguably WORSE than losing a level in EQ1, because you did not want to be doing PUG dungeon finder runs to begin with.
As long as this is the case, making more substantial death penalties only serves to increase the amount of time your customers have to spend doing stuff that they did not want to do to begin with - not the best business plan for a genre that depends on retaining satisfied customers.