Phasing as per how Blizzard does it has been used in other games as well. It's a version of soft instancing - the split condition doesn't have to be a certain amount of players, it can be anything.
The main issue with it is that it, if done wrong (Blizzard doesn't, apparently), as a friend of mine put it, "looks ****ing stupid". For example, if a certain boss is present for character A (who is fighting him) but not for character B, then from the viewpoint of character B, it would seem that character A is fighting... air.
Social interaction can also become awkward: Imagine you have a quest about saving a village from a zombie horde. Let's say phase 1 is a zombie-free village with a quest-giving NPC, phase 2 is village overrun by zombies, phase 3 is once again a zombie-free village without the quest NPC but with a statue of yourself as the saviour of the village. Naturally, it starts out at phase 1, becomes phase 2 after you take the quest and leave for a while and then come back (you might be sent to a nearby town to "ask for help" or some other excuse), and phase 3 once the quest is over.
You ask someone in town for help with saving the village from zombies. He agrees, and you rush to the village. Oh, no! The zombies are already all over the place (phase 2) - you rush in and start attacking them. Your newfound friend, on the other hand, stands around looking confused. He doesn't have the quest (phase 1. or, worse, he already finished it: phase 3), so he don't see the zombies. Or, even worse, as soon as you enter the phased area, he's not in your party anymore.
This isn't to say that phasing or soft instancing is a bad idea. It's not. In fact, it's a great idea, and it's the future of MMOs, I think. But it does require a lot of careful thought and hand-crafting.
I'd like to mention something else. Instancing doesn't mean a loading screen.

It's entirely possible to pre-load an instance and then just allow the player to seamlessly enter a portal or something - well, it doesn't even need to look like a portal.