I think the main reason against that is it would be hard to moderate and anybody can put any adult/graphic image.
Now that you mention it, it might not be such a great idea (well, to M$ at least). Men woulda find all kinda gayness to use as gamerpics.
That said though, I still find they coulda make the avatars less childish looking. I understand the need to appeal to all ages/sexes, but damn...
the majority of 360 owners aren't 8 years old, which is what these avatars seem to want to pander to.
...and don't even get me started on the Wii counterpart. As innovative as that system is, I just CANNOT deal with the 'Mii'.