First, think of the distinction between Star Trek TNG and Babylon 5, or between Merlin and Game of Thrones. Living story, at least so far, has proven to be rather episodic in nature - it's been proving to be a case of "what's the problem we're going to have to deal with this month" without having much of an overarching story. Yes, we're getting hints at this mysterious 'personal nemesis', and there are callbacks to previous episodes, but that's just like how pretty much every Smurfs episode is Gargamel trying to find some way to wipe them out - having a single Designated Badguy does not mean that the story is actually progressing. Focusing entirely on Living Story is starting to look like it'll end up feeling like a series of Monster of the Week episodes that don't really progress the story - and as long as it keeps being temporary content, it has to be that way to avoid new players completely missing out on a critical plot event. An expansion is more like a season of B5 or Game of Thrones, or a book in a book series - when you get to the end, you come away feeling that the plot has actually progressed in a significant manner.
Unless the book is written by Terry Goodkind.
Second, there are a lot of things story-wise that people would like to see happen - and which are much larger in scope than the Event Of The Month we've been getting. People want to visit (and deal with the problems in) Elona and Cantha, launch campaigns against the remaining dragons both known and unknown, investigate the ruins of the underground asuran empire, find out what's going in in the Maguuma, and so on. These are things that are much grander in scope than the Living Story we've seen so far, and exploring a new continent one zone at a time as they get introduced through Living Story just doesn't seem like it would do it justice.
Third, people are also looking for mechanical advancements as well as just story. Races, possibly professions, new weapons, utility skills, and traits. These are things that are just too big for the Living Story stuff we've been seeing. A new race would mean a new city, likely new starter zones (even the tengu, bordering on Caledon, would probably want something to take them up to level 10 or so, which is where the tengu gate comes out onto the Caledon) and new personal story at least up to level 30. New weapons, skills, and traits are something that would probably work better being released at a block so they can be balanced as a block (although, to be fair, Team Fortress does seem to work well enough with it's 'class updates', but I think I'd prefer them all to come out at once rather than having some profession that misses out because it's last on the list).
Fourth, the fear of how the economics will work out has to be considered. Expansion packs, generally speaking, tend to represent better value for money overall than microtransaction extensions that players opt in and out of on an individual basis - and let's face it, when you convert them to real money terms, the prices in the gem store aren't really all that 'micro'. Buying individual features also smacks of pay-to-win - even if not deliberate on the company's part, no balancer is perfect and odds are sooner or later some microtransaction item is going to become a must-have - while expansions tend to carry the assumption that if you're serious about the game, then of course you'll get the expansion.
Finally, we're a couple of months away from the point where it's fair to start comparing GW2 to GW1 post-Factions release. GW1 after one year had two new zones, a set of new quests that tied off loose ends in the main story rather than going off on a tangent, and a couple of festival events... and two new professions, a near doubling of the options for the existing professions, new PvP maps, and a whole new continent to explore with a story about half the length of the Prophecies story. Unless the next couple of months greatly exceed expectations, GW2 looks likely to fall well short of that yardstick. Now, considering that they've just reorganised how they do LS, it might be fairer to compare to immediately post-Nightfall in another eight months after we've had an opportunity to see what the new LS starts producing - but unless the LS starts producing at the very least double the amount of permanent content it has been, it's likely to fall well short.
Thing is, while LS is certainly better than nothing, a lot of us have essentially been regarding it as something to keep tiding us over until an expansion rolls around with the real added content. If Living Story is really all there's going to be from here on in, than the Living Story teams are really going to have to pull their collective fingers out to keep people engaged.