(Welcome to my world. Do you know hard it is being a fan of good, coherent storytelling these days?)
I feel your pain sir, it hurts like hell. Yeah as someone who played through the Nintendo age I can say with a bit of certainty that a Nintendo hard games suck the enjoyment out of the game like nothing else. The last thing I want to happen after I finish putting down a controller is me being angrier and more frustrated then when I picked it up.
Ah yes the challenge of balancing the level of skill and difficulty and the necessity of death's role in a game. An interesting topic and the subject of much flame and troll. Nobody is ever going to be happy so its always matter of finding the sweet spot where you have the fewest people whining. I hope Biowear finds it, even if they have to tweak the game a little over time.
Now imagine the game without the checkpoints, so that if you die you have to start the entire chapter over from the very beginning. The combat and gameplay mechanics are otherwise identical, it just sets you back more when you fail. If you think about it, this doesn't make the game any more difficult to beat. It takes the same level of skill to reach the end of the game.
In the example you're offering, having no checkpoints would force you to pay more attention and generally be on your toes - it'd take a bit of practice to go through a level without dying. So it's definitely not the same level of skill. In a way, if there were no checkpoints you'd be better at the game - because it would force you to. Unless the game's super easy anyway, but Force Unleashed had some dick move moments.
Punishment DOES add challenge to a game, it's just not the same thing as challenge. But they're intertwined.
In fact, Demon's Souls uses this system. When you die, you have to start the chapter over, and repeated deaths are punished even more heavily. Would the game have been better with checkpoints? Possibly, but the overall difficulty is so high (like in Mario games) that forcing the player to redo large stretches of content will noticeably raise their skill level, so the time isn't wasted.
For a game like Prince of Persia where the difficulty level is very low, forcing the player to backtrack is just wasting her time.
If you keep dying in Section 3 of a 5-section level, restarting at Section 1 is not going to improve your skills any more than restarting at Section 3 each time you die. Ultimately you're going to keep dying at Section 3 until you master that particular encounter (as the aforementioned memorization poster pointed out happens), but in the version with checkpoints you can make attempts at the encounter that's actually giving you trouble more quickly, as opposed to being forced to repeat the previous two sections that don't challenge you over and over again. It doesn't add challenge, it adds time.
Think of another example: you know those boss fights in some games with long cutscenes before you fight them, cutscenes that start over every time you have to re-try the fight? In some games you can skip those cutscenes; in some games you have to watch the whole bloody thing every freaking time. Which version is more challenging? ...neither, the bosses are the same. One just adds the extra punishment of wasting five minutes every time you have to re-try the fight. Doesn't make it any more challenging, just makes the game itself more annoying.
This entire article is based on the premise that every MMO must include lots of grouping to plow through raid-type instances (and thus a real death penalty might frustrate the grouping).
That's not true. MMOs don't need to be that way.
I agree that challenge should be balanced with punishment. Super Meatboy, for example, is a very challenging game, but gets away with it because it has a reasonable punishment: try again from the start of the level (instantly). If you had to start at the beginning of the world you would have to play perfectly for minutes (a long time in this game) to gain one attempt at the section you are struggling with, while if you started merely a second or two from your death you could just luck your way through entire levels.
The punishment should be designed to keep the main challenge of the game at the forefront. The challenging levels are the whole purpose of Super Meatboy, and the only reason I play it. This is why it succeeds so brilliantly: each level is a distinct challenge and the punishment sets you back just enough to retry (and continue to enjoy) your current challenge without making you redo previous challenges or aiding you with this one.
An example of poorly executed punishment is in UFC 2010, specifically the career mode. The main challenges are obviously the fights; namely, winning them. One would think the spars and training camps, which you do to increase your skills and learn new techniques, respectively, would be structured so as to either allow you to practice using these skills and techniques, or to encourage behaviour that would allow you to surmount the main challenges(i.e. win fights). Instead, sparring splits all actions into positive or negative and each worth 1 point for you or your opponent, respectively. This means that if you hit him with a jab, that's 1 point; if you hit him with a haymaker and knock him out in one shot, that's 1 point; if you hit him with a haymaker and he blocks but you still do severe damage to him and he falls over dazed, that's 1 point for him. The systems for learning techniques vary but are all equally idiotic, with the result that strategies that win fights earn you nothing in training and strategies that pay off in training get you KTFO in fights (using the techniques you're training in also generally earn you nothing). In this case, the punishment isn't bad because it's too harsh or too lenient, but simply because it's stupid and unrelated to the core game.
As for punishment in MMORPGs I have no idea as I just don't get most of them. I play RPGs for the story, for the sense of accomplishment, for authorship of the world, for the immersion, and yes, for the challenge. MMORPGs seem to throw all of this away except for accomplishment:
There's no real story, as intricate, narrative-driven quests are replaced by thousands of generic monster-hunting exercises.
Accomplishment is both almost solely relegated to your level and material possessions and cheapened by being achieved in a world where the heroes outnumber the civilians.
What authorship can be had in a world that accepts no change but that which the developers create?
As for immersion, playing an MMORPG seems like getting a bunch of LARPers together, but instead of RPing, you have a heated game of badminton instead. Now, I'm not against the occasional badminton game, but I'm sure as hell not going to dress up like a wizard to do it.
While RPGs are not generally very challenging games, and tend more towards strategy than skill if they are, the lack of the above redeeming qualities in MMORPGs make the lack of challenge much more objectionable.
It just seems that for what they are, MMORPGs don't have to be RPGs at all; they share almost no similarities with one, and I find their superficial imitation disturbing, like a bear with a man's face.
I do think death in an MMO should mean more than it does in, say, WoW. I've been playing Eve Online for years, and I really like how death is handled in that. I especially like how any surviving modules from your ship can be taken from the wreck by anyone who gets to it. This means most players will be using generic equipment which can be purchased easily and how you use your gear is more important than how big it's bonuses are.
It also makes additional playstyles valid, such as trying to make a living as a pirate preying on other players. This in turn can lead to deeper emergent gameplay, where other players might band together to clear pirates out of a region to make it safer for a while or they might take a different & longer route, leading to different encounters and scenery.
I'd like to see more games treat your gear as throwaway, so it's more player skill and group planning that will matter in a fight, not simply how long you've spent grinding. I would also like to see death in an MMO mean you haven't lost everything, but you've definitely lost something. It gets adrenaline pumping in a tough fight, and forces you to plan your actions a little more. A harsher death penalty than you'll find in most MMOs can lead to a deeper and more complex game, provided (and this is important) the other mechanics in the game support it, such as the ability to loot other players, the reduced need for high-end equipment, and the ability to interact with your fellow players in more complex ways.
I haven't played in a few years, but Eve handled PVP and death almost perfectly. Fighting actually meant something in that game; you could lose a lot when you fought, but at the same time you could gain quite a bit too. You could build an actual reputation, since people remember who caused them significant damage (or saved them from it). And there's nothing like the adrenalin of the first few fights you get into with a shiny ship that you spent a long time working for and you'd really rather not lose.
Stricter (though not game-ending) death penalties make a better game. It teaches players to be cautious and inventive, encourages greater player interaction (since mmo's by definition should not be single-player games), and are hundreds of times more satisfying to succeed at.