I think the biggest issue from all these threads really has nothing to do with item loot. Everyone is afraid of everyone being on 1 team and there being no real pvp. That can happen with or without item loot, in fact item loot will probably have no bearing on the 'zerg problem'.
The most important things seem really simple:
1) have enough people on the server to fill 3 teams (hopefully somewhat equal)
2) have at least 3 strong leaders with 3 good pve guilds to rally each team
There sure seems like enough of y'all that hate each other to take 3 factions. Just make sure the factions are relatively balanced. Each side pick a captain and start recruiting.
If you have 3 teams with fairly equal people you're gonna get good consistent fun pvp item loot or no item loot, no drop or drop.
The best part of classic eq is gear doesn't make or break you for pvp (at least not nearly as much as it did in later expansions) A "walmart" lvl 60 vs a high end lvl 60 in classic can still be a good fight (not like a 65 0AA cap geared vs a 65 500AA time geared with double hp/ac/etc in PoP)
And also someone else made a good point too that in teams you'll have the top 'good' guild helping out the casual 'good' guilds in raids etc since those guys will be there allies on the battlefield unlike FFA pvp.
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