I've never stayed on-site, so I can't make an active comparison. But, I did a lot of research, and we really enjoyed our off-site stay. I just can't imagine that on-site would have been better.
We are DVC members, but if we go for additional times over what our points take us, we look for the best deal. For instance, we went to the Alabama-Mich. State game over New Years and stayed off-site b/c we had used up our DVC points with a stay at a Treehouse in March 2010 over spring break. My FIL gave us a timeshare to trade and we ended up at Orange Lake - West Village and it gave a good perspective of what we liked on-site vs. what we didn't like, and like everything, it has its pros and cons, with the Pro mainly being price (since we usually do DVC, the space thing we are used to...)
Reasons:
Transportation - heard a lot of stories of long wait times for on-site transportation. When we wanted to go to the park or leave the park, we could get in the car and go. Most nights the kids fell asleep in the car on the way back in their carseats and not in our arms standing on a bus. I also heard an awful story from hubby's best friend about a kid throwing up in the aisle of a crowded bus. It was bad! We stayed very close to the parks (Buena Vista Suites) and from what I've heard the travel time wasn't much different than staying on property (of course this depends where you stay on and off). The travel time was quicker than I'd thought and we didn't pass by any outlet malls or Wal-Marts. We were pretty much the first thing you came to off property.
We have done both. Personally, I prefer the buses as I don't have to drive when I am very tired. Usually, it took about 30 minutes to get back to the room, but driving while tired does wear on you. Now, NYE, it took us 3 hours to get back, but that is definitely not the norm...
I think that one thing to consider is that if you stay offsite and drive, yes it is generally not too bad, but one thing we found that we liked about on-site is that if we have another family with us (we usually invite friends with us and stay in a 2-bdrm DVC), they don't feel like they have to stay until we leave. They can come and go as they please using Disney Transport. Same goes with families with teens and college aged kids.
Cost & Space - It was cheaper than a Value and much, much larger. We had a one bedroom suite, so there was a bedroom plus a separate living room with sofa, chair, table, fridge (very important for me with the kids) and microwave. Even with a pack n play, we still had lots of room in the bedroom, plus the full living room. And if the kids (or one kid) were sleeping in one room, we could be up in the other room.
Agreed here on cost. Disney accommodations are definitely more expensive than comparable off-site options. However, I don't think that they are that much more at first look (at least for values and moderates). We are going for a couple of nights before our cruise in a few weeks and most everything offsite that is name brand (Hilton, Marriott, Hyatt, Starwood, etc.) is going for over $100/night. Hilton Bonnet Creek wanted $299/night (For that money, I'd rather stay at AKL) I do agree that if you VRBO, Redweek, Priceline, etc., that you can get a deal, but you have to work at it. (FWIW, we ended up getting Rosen Shingle Creek for about $60/night via Priceline after a few failures...).
On size, DVC villas offer 1 and 2 bedroom units, most are slightly smaller than offsite (though Old Key West is probably larger than most offsite units), but offer all of the same condo space and feel, with all of the onsite benefits.
Food - The Buena Vista Suites had a free full breakfast. We'd fill up on breakfast, and then get either a snack for lunch then an early dinner. Or eat a late lunch and then just snack for dinner. Spent way less on food than I expected, for us, the dining plan would have been a waste unless we could have gotten it for free.
This is where I found the biggest surprise. I thought that I'd like eating offsite. I was tiring of some of the Disney restaurants and looking forward to just going and getting some Olive Garden or Red Lobster or something. The problem with eating off-site was two-fold. First, we found that we lost a lot of time by leaving the park, getting to the car, heading out to 192 or wherever and coming back. Just getting to the restaurant and back usually cost at least an hour if not more. Second, and more frustrating (though maybe it had to do with the time of year) was that we'd walk into restaurant after restaurant and each one would have an over 1-hour wait, so you spend extra time just trying to find a restaurant to eat at where you can get in.
I really missed just having a reservation somewhere in Disney where I could plan to be, pretty much walk in at my reservation time, eat, and then be right back out in the park, or at least, close to a park. Likewise, if on a budget, we could just forgo the "sitdown" meal and eat at a counter service place.
Now, that being said, the prices Disney charges for many of its restaurants is ridiculous. There are one or two that are reasonable (for Disney - Turf Club and the Plaza come to mind), but for the most part, the table service food is way overpriced.
It really depends on your priorities, your situation, how much you have to spend (we were on more of a budget), and how you like to travel, but for us, off-site just makes more sense.
Agreed, but there are advantages to being onsite in terms of convenience. One must weigh the convenience vs. cost and judge for themselves. I will say, that after being in DVC (and I think this can be generalized for most anyone that has stayed in condos) it is hard to go back to a normal hotel room. If I were not a DVC member (or, when I am out of points), and I was looking for an accommodation, I'd go condo/timeshare/house all the way...