The former. If we give paid race change, what's next, barber shops? Part of the Vanilla/TBC experience was your decisions at the character creation screen having a permanent impact on your toon.
This is simply a cosmetic change for people who donate a large amount of money. As long as you can't switch from horde to alliance, vise versa, then it is simply a cosmetic change, and won't alter our PvP setting currently at all. I don't see any issue on this being implemented. I'm not like horny to see something like this, but it wouldn't be a bad thing either. Be nice to switch from a human to dwarf, etc. in the future. I think people are automatically assuming there will be faction change, which isn't the case. I understand that chosing your own character and sticking with it is a part of what vanilla/tbc was. But its not like everyone is going to suddenly change into something new. This is for the crazy bastards that donate 100+ and is like a small reward for supporting the server. This isn't going to ruin the vanilla atmosphere. (if it was faction change, then I wouldn't support it.)