Here is my point of view on the on-site vs. off-site debate:
We visited WDW 12/27/08-1/7/09. We have stayed at WDW several times before, always on-site. WDW resort rates are ridiculous over Christmas week, so we decided to try renting a condo for our first 5 nights, then checked into All Star Music (family suite) on January 1st. We got a 4 bedroom, 3.5 bath condo with full kitchen, washer and dryer for $100/night. The condo was nicely decorated and clean. The resort itself was very pretty, with a nice clubhouse, pool, tennis, and basketball courts. We did not have our own private pool, but the clubhouse pool was a 2 minute walk. We knew the Disney parks would be crazy that week, so we went to Sea World one day, spent a couple of days lounging by the pool, playing tennis, and relaxing (which was great tight after Christmas!). We did go to Downtown Disney one afternoon/evening, and ate at Chef Mickey's one night. New Year's Eve we spent the entire day/evening at Epcot. So we definitely got our "Disney fix" during this part of our trip.
My girls are 13, 13, and 11. They are very good kids, but there was definitely a fair amount of sibling arguments, picking on each other, etc. during our stay at the condo.
I must say that my family had a complete attitude change when we checked into All Star Music! Not that they were grumpy and crabby before, just normal sibling stuff. They all seemed much happier, got along better, and joked around more once we got to ASMu, even though we had much less space to spread out in than when we were at the condo. We did still have 2 bathrooms, and they all had their own beds in the family suite. It was almost as if they felt that we were finally "at Disney". I know that is how I felt.
I asked my girls when we got home if they liked staying in a condo, and they all said "yes, but not at Disney World. We want to stay at Disney". So even though we had a great experience with renting the condo, there was definitely something missing. Say what you will about "Disney Magic", but it is definitely real for my family. If we can afford it, we will always stay on-site in the future, and save our condo trips for other vacations.