It’s an interesting concept. I imagine the theory is that once you’re hooked into AO and have a guild of friends, you’ll want to join them in areas or activities that require an expansion (and a paid account).
The kicker as always are other people. Generally the easiest way to determine that someone is who they say they are is to get money from them (like, say, a credit card number). If you can’t do that, you can’t really tell who they are, since on the Internet no one knows you’re a dog. There’s also the prospect that hundreds of thousands of people think "hey, free MMO" and blow out the server (note the "weasel clause" in case that happens). Or that hundreds of people start keeping your customer service people busy. Then again, AO has volunteers as a linchpin of their CS still (they can, being based in Europe where such things as volunteer labor, socialism, and Jacques Chirac are still taken seriously).
Another MMO, Knight Online, has used this approach for a while, and isn’t a raging success.\’c3\’82\’c2\~ Matt Mihaly’s text MMOs (as he likes to call them) also have "free until you want stuff" models and it seems to work for them.