Oblivion was also fairly stripped down. Look back to Daggerfall to get a better idea of what people are talking about when they complain about Bethesda's later games being "dumbed down".
Daggerfall barely works even after patches and most of the game world is randomly generated boredom and strangeness. I'd bet Daggerfall was ridiculed for being a step down from Arena.
Bethesda couldn't make a game remotely stable until sometime after Morrowind got all patched up and mostly worked. Oblivion v1.0 was a marvel of stability and functionality compared to their prior efforts. I think they figured out some massively superior testing methodology over there (I remember a comment about it in an interview).
Oblivion's gameplay problems stem from the challenges of the fully open world RPG, which is not exactly a common game type. It's pretty much Bethesda's genre. The way they try to address the issues in different ways with each release is interesting. But they obviously can't really nail it down perfectly to make everybody happy. The various mods try their own takes at it but none of them are unarguably ideal.
Anyway, I am pumped for Skyrim. Visually it is definitely a major improvement, particularly the distant view. Oblivion had a small bubble of detailed area near the player but Skyrim is not like that at all from the vids. They also apparently hired some of the modders that put out quality Oblivion gameplay and AI work and that is even more exciting.
Eh maybe it was just you. I've installed Daggerfall on numerous systems throughout the years and have never had any issues. I haven't tried the "free" download from their website, but I can't imagine it would be any different. Also I don't remember anything game-breaking about Morrowind before it was patched. Their games have always been notoriously buggy, even with patches, but I've never been forced to *not* play because of a bug. Patched Morrowind is as stable as an Elder Scrolls game could be IMO.
I'll admit when I first got Morrowind I was totally perplexed; this was the long awaited sequel to Daggerfall and having heard nothing about the game before buying it, I was in for quite a shock. The game was obviously vastly different from its predecessors but it sucked in me completely. Morrowind probably is my favorite game of all time; I replay ad naseum and still fall in love with the game.
I really love what Oblivion did with many gameplay mechanics; stealth, melee, and magic combat are all vastly superior to Morrowind. Really I think those were the biggest complaints that many people getting into Morrowind have; I introduced my housemate to Morrowind and when he kept getting killed he quit the game in a fit of pique saying "this is stupid, if my axe hits them visually why doesn't the game register it?"
The reduction of skills was irritating, but somewhat bearable, especially since the perks added a nice touch to skills. But then you start noticing more and more little things. The vendors in Oblivion were useless and frustrating. Since the game enacts a leveling system, I found myself not relying on vendors at all (not in the case of Morrowind where I saved up tons of cash to buy rare to find ebony armor or glass in Ghostgate), except maybe for spells. That right there reduces the amount of immersion and interaction I have. The reduction of armor slots; certain clothing options didn't exist, wearing clothes and armor wasn't doable, the removal of pauldrons and the merging of gloves/bracers. The clothing issue for me is a big one because that is a huge role-playing element. Mixing and matching outfits in Morrowind was extremely enjoyable, and cloth vendors were awesome.
It also dawned on me pretty quickly how boring the game felt when my warrior was only really suited for one faction. There are only 4 real factions in Oblivion and that is a travesty. With Morrowind my paladin-esque character joined the Fighters Guild, Imperial Legion, and Imperial Cult. I could have also joined House Redoran (and indeed through some play throughs I have). People have said the questlines for guilds in Oblivion are better, and I would only say marginally so.
Spoken dialogue also drove me insane. I like to read. I love reading. I enjoy envisioning the voices, and the much more rich dialogue you can get with text. A few sentences along with the greatly reduced dialogue topics was another little thing in Oblivion.
I could go on, but I think you get the point. For me it was the culmination of many little things in Oblivion that really turned me off and made me say "pah." Had they simply changed just the combat system for magic, stealth, and melee, and retained everything else, I would have loved that. I'll have to see with Skyrim, but the reduction of core RPG elements like stats is already making me have my doubts.