Wrath made 10 mans an option where as before there was really only one or two raids and they didn't have the same sense of progression that the 25 man content had. Still popular opinion places 25-man content higher in the pecking order and those who choose 10 man content over 25 man content are not taken as seriously and probably openly mocked in a PUG environment.
The idea of 25 man content providing better rewards never really made sense to me. For the most part 25 man content is as easy if not easier than 10 man content. I attribute that mainly to the diminished effects of a single raiders performance effecting the outcome compared to a ten man where people are not only more responsible for their chosen role, but may also be asked to fill a second role at times often on the fly.
The main argument of why 25 mans should provide better rewards is one of logistics, it is harder to get 25 people together. That added investment of time and effort is only made by a few people out of the 25 involved though, most players in a 25 man have less responsibility that they would of had in a 10 man. So if it were feasible it should be the organizers of the raid getting the extra rewards, not everyone.
So the recently announced changes for Cataclysm are much closer to how I think things should be, but if it were me I would provide proportional rewards in 25 man, but not any more per person than 10-man content. So more item and more gold, but not more badges since they are given to everyone and don't get shared.
If 25 mans become less popular as a result that only means that people were running for the rewards and not because they preferred them over 10 mans. Most of them weren't the ones actually organizing the runs anyway and I bet that those who organized runs in the past will continue to do so whether it be a 10 man or a 25 man run.
I think the next step for Blizzard will be to further equalize the two and perhaps scale content to a variable number of players even if it is only done for each 5 players. Having the ability to run with 10, 15, 20 or 25 for the same amount of reward per person would further emphasize the bring the player idea by allowing people to bring everyone they wanted without having to bench someone or search for fill-ins. That is two more levels of content to balance around, but it would be just an interpolation of the 10 and 25 man versions.
I'm pretty sure I will be running 10 mans pretty much exclusively in the next expansion and only run 25 man content for things like raid quests (assuming they continue them) where there are a lot of people interested in one boss/raid that wouldn't normally be. The best part of that being that I can play with the small group I prefer and not feel held back in the sense that I can't get the better rewards.