Personally, I don't think it's about the rivalry as much as it is that Ohio State and Michigan are usually going to be the two best teams in the Big Ten in a given year. As the divisions are right now, I have a hard time seeing anything other than Ohio State dominating the Leaders division for years under Urban Meyer. If you look at it from Indiana's point of view, Wisconsin is removed from your division, but then Michigan and a resurgent Michigan State team are added. Sure Indiana's been bad for a long time anyway, but it is going to be incredibly difficult for them to ever win that division. Indiana, Rutgers, Maryland, they all have to beat out Ohio State, Michigan, Michigan State, and Penn State to win that division. Just beating Ohio State is going to be hard enough.
If you look at it from our point of view, sure we have to beat Nebraska and Wisconsin to win the west division, but that's not an entirely ridiculous scenario, and neither of those two is as good as Ohio State. Nebraska's good, but not win-the-conference-five-straight-times good (six if you count Ohio State's vacated 2010 season). Wisconsin's good too, but again, they're not Ohio State or Michigan.
I like option #2, the east/west split for the Gophers. That west division looks like it could be very competitive, with Nebraska or Wisconsin being favored most years, but not a foregone conclusion that the winner will be one of those two. Iowa, Purdue, and Illinois are about on our level right now, and while Northwestern has beaten us a lot recently and has even put together a couple of 9 win seasons, they've never really dominated us on the field, they won by 8 or something this year, by 1 last year, in Brewster's first year they beat us in overtime.
Basically, while I like the idea of a geographical split, and while I like where the Gophers end up in that split, in a competitive division, and in a division with Iowa, Wisconsin, and Nebraska, I'm not sure it's best for the conference. I just see the proposed eastern division being primarily dominated by Ohio State, with Michigan or Michigan State winning sometimes, maybe Penn State if the sanctions don't cripple the program. I don't know much about Maryland or Rutgers football, but I get the feeling that Rutgers only cracked the top 15 this year because they play in the Big East, and so I see very little chance of Indiana, Rutgers, or Maryland ever winning the division. Sanctions have done very little, if anything, to slow down Ohio State, and with a big name SEC coach at the helm, I just don't see anyone beating them anytime soon. That said, they didn't seem like one of the better 12-0 teams that college football has seen, with fairly close calls against Cal, Purdue, and Indiana.
TL;DR Western division looks like a great place for the Gophers to be, Eastern division is very top-heavy, and when Ohio State doesn't win it, Michigan probably will, leaving very small likelihood that any of the lower tier teams can rise up.
