Having finally completed Daggerfall, and having beaten Arena back in '06. I have to say I think Arena was a better game. Is this an uncommon opinion I wonder? (that's really the only question I'm asking here.. everything else contained is just personal opinion)
I prefer the... distinction? between the races in Arena which I felt were negated by the class creator in Daggerfall. Also, the premade classes of Arena are distinct via equipment limitations, spellcasting availability, lockpicking, critical strikes, mana and other unique traits. While I like the idea of being able to create your own thing entirely in Daggerfall it is so easily abused that it really negates class/race choices. That being said, I know Magic in both games is easily abused and I actually performed my Arena playthrough using pre-made spells only when I used a Spellsword.
Setting that aside there are only two other major factors that hurt Daggerfall for me..
The first is that exploration was not nearly as enjoyable. Outside of cities and towns there exists really only two types of places to explore - the wilderness and dungeons. Unfortunately, the wilderness is a huge step down from Arena which had ROADS creatures, houses, inns, dungeons, etc. Yes, you could actually travel between locations in Daggerfall's wilderness but the wilderness itself and empty, barren waste of space that had absolutely nothing in it unless you rested to get that random encounter. There was absolutely no reason to do anything but fast travel and while on the topic the map was inferior as well. Arena's map had little drawn graphics with names for towns and cities while the Iliac Bay was a cluster of squares in which you could had to mouse over and couldn't even use the "I'm At" button unless zoomed out to a level where it was difficult to see. This was because there were so many more locations but would I have sacrificed some hundred cities I never visited for the pleasure of a better map system? Yes.
The other type of place to explore outside of towns were dungeons. In terms of navigation they started out challenging, became frustrating and then moved into the realm of an absolute snorefest that was completely intolerable. I guess this was in part the fault of a poor random generator? Certainly in part because of the awful map system. The price paid for 'fully 3D' dungeons over Arena's level-by-level design was too high which means it simply wasn't ready for it. Sometimes I would get a little frustrated in Arena's dungeons but the auto-map got me through it and if it got really bad you could Passwall. I finally used walkthroughs to get through the Main Quest dunegons because I was so bored of the games uninteresing dungeons. The final dungeon was actually nicely designed but I had already lost interest and patience at that point and ended up using a walkthrough as well. To me exploring is a huge part of any RPG and while Arena was primitive it was fun, whereas in Daggerfall it was not.
The second factor was how buggy the game was - even to this day, even with latest patches AND unofficial fixes. There were too many things to list but they definitely hurt the immersion. This is a shame as well because the variety of quest 'backstories' were interesting even if a lot of the main objectives were somewhat recycled. In the end I found myself turning down any sidequests that involved dungeon crawling for the reasons stated above and what was left was usually simple courier quests or slightly more interesting quests that would often get bugged and be impossible to complete. A shame.
At the end of it all, I felt Arena was a better experience for me but Daggerfall really had the POTENTIAL to be an amazing game. If I were just playing the game as a child using my imagination to create my own stories and rules to play by I can see where it could potentially outshine Arena but the bugs (which were even more numerous back then?) would definitely put a huge damper on that.