My son plays in a medium sized town (about 30K) that has an AAU and/or AABC travel team that is under the umbrella of the local LL. Kids are allowed to play both, but not all players or teams do both. Some of it is scheduling conflicts - my son's 12U team is playing in two travel leagues over a 3.5 month period, so no time for local LL. I can't think of any kids that opted out of travel to play LL for the chance at Williamsport. The 11u team is playing both AAU and travel (2/3s of team opted to do both), and what will be of interest is how the 11U players affect the All Star team selections. Many of them will be amongst the best players, but the selection process may or may not take the "loyalty" factor into consideration - it's to be played out, and I'm sure it'll cause some controversy one way or another. Our league is starting to integrate the travel kids into LL at the lower levels, and may eventually require that, which is not uncommon in CT. In fact, many programs make local LL the priority, and travel games are of secondary importance. Ours hasn't hit that point yet, but it might go there.
It's clear the travel programs have affected the quality of play in LL, but I wouldn't say that's necessarily a bad thing. Just different, and perfectly OK as long as all the kids are having a fun experience. There's a conflict of thought amongst the powers that be - on one hand, our town is not putting its best kids on the LL All Star teams if they do travel only, but at the same time, other kids are getting to participate in the All Star/tournament that they might not otherwise experience. I don't think our town would go too far either way. FWIW, I think most, if not all of the US teams making it far in the LL world series (regionals and beyond) are populated by travel team players that play enough LL games to become eligible. The last CT team to qualify - (Westport IIRC) has that situation.
If kids are going to both, it behooves both organizations to communicate and set expectations and priorities. Our town can do that easier because both teams are under the same management. Generally for now, kids have to play 70% of LL games to qualify for All Stars. Kids who pitch/catch travel can't pitch/catch in LL. Logical process is games priortize over pratices. Due to field availability, the teams do a good job of not having game conflicts, but it still can happen.
All or nothing requirements can chase away good players, as players (or more accurately, parents of players) who want to become better at baseball will opt for more games, more practices and ostensibly better coaching offerred by travel baseball -- which comes at a price. Delusions of grandeur, perhaps. Our team is made up of volunteer coaches, and we do our best, but we go to an indoor baseball facility and get professionals to coach them during winter workouts. Also encourage pitching lessons and catching lessons if players want to pay the cost to do it. In the end, we are more expensive than local LL ($180 vs. a little over $1K all in, including travel costs (hotels) for a couple tournaments) but we are about 50% of the costs of area professional travel team programs. Our program offers the travel ball experience, playing against good competition, but for a competitive price.
My son has been playing travel only since 8U, and I've been an assistant coach for his teams all that time. I'm also on the Exec Board of the local LL, and sponsor a team, so I support the local LL and am familiar with all sides of this issue. I'm not sure what's better. For us, there's logic in spinning off the travel program from local LL (as well as support for that from peeps who don't like the travel program), but I think there are concerns doing so would be a net loss, as the travel team coaches make up a large portion of the volunteers taking care of fields, filling board positions, and generally getting things done for benefit of all.
Lax and soccer eat into our local player pool for baseball, too. Soccer is full year if you play premier, and lax is very popular and growing - football/lax is a common combo encouraged by coaches of both at the youth level. LL is hanging in there, but numbers are down.