1) Keep developing the game as they did pre WOTLK - meaning: make it hard, but rewarding. Make it unforgiving and a true RPGMMO.
2) Finally give in to all the whine "game too hard for casuals", "dont want to play this game if I cannot be like THAT GUY", "I want to be a gladiator also, but I am too lazy to improve, make the game easier so I can get glad with no effort at all"
Sadly, as the second development path was where the majority of the players were (where all the money was), they choose to develop the game in that direction. The impact of this was huge. Once everyone can get everything they want, that SOMETHING (whether its a title, mount, gear, achievement) loses its value. If everyone can have spectral tiger - spectral tiger is not desirable anymore. Doesn't matter it looks good, if everyone has it - loses value. That is exactly what had happened to this game after they gave in to all the whining "I want to be as good as that guy and I WANT IT NOW!". The game got simplified which resulted in a decreased ability to outplay your opponents, thus making it easily playable for everyone. But guess what? No one really likes this once they realize that they are not special and that things you do can be done by anyone...
Don't even be sarcastic about it because I feel blizzard developers cannot distinguish if you are being sarcastic or serious.
They thought that option 2 was where all the money was but the subscriber numbers clearly show that it was not what people actually wanted regardless of what they were saying on the forums.