I think that's the common use for the Domino. Probably the only time a traditional mortise and tenon joint would really be needed in furniture is if it'll be exposed and you want the rectangular appearance or in cases where a tusk tenon would be appropriate.
Can't answer your question with experience, but my understanding is exactly that - people use the Domino to create loose tenon joinery.
Domino machine (the cutting part) is used to create a mortise in each piece to be joined, and a Domino (piece of wood) is inserted with glue to join them. So yes in general a Festool Domino is used instead of a mortiser. I don't own either so I can't comment on the relative merits.
(Dave posted while I was typing - but essentially the same idea. I resisted comment on selling the mortise instead of the mortiser.)
I've been doing some wishful thinking on getting an entire Festool domino set up--700 cutter, 36 vacuum, and 2 boxes of all sizes of dominos. Wham!! I hit $3000 cost. Where did you get your Festool set up, and was it less than that?
I use a model 700 heavily. It isn't anything new or revolutionary, mine replaced a free standing Italian made slot mortiser which brought in only slightly more than the Festool cost me. The one thing it does nicely is travel to the work. I use a $25 Lowes ShopVac with no special hose or attachments when I need portability. It is an accurate, fast, efficient, repeatable, machine - that comes at a premium. Hope this helps.
I do not own the larger domino, but I do have the smaller model, which I have used extensively. I can only recall one occasion where I really needed the larger domino, otherwise the smaller one has served me well. Unless you really want to, you may never have to chop another mortise!