becuz u wuld destroy the lore. the hero u play in the game is supposed to be relevant to the next game they make. if u joined dagoth ur there wuld be no battle at red mountain becuz u wuld leave to conquer everyone. numidium wuld not be destroyed. if in oblivion u joined dagoth the empire wuld be totally destroyed. meaning dagoth wuldhave never been defeated. and he wuld practcally gain control of the empire eventually. so maybe there can be some bandit guilds etc. but nothing too big.
Even in Oblivion, the lore and the canon ending are independent from the actions of the player.
You can play Oblivion and never finish the main quest and yet, there is a specific canon ending the devs adopt that is used as a reference for the next sequel, novelization or graphic novel, etc.
It has nothing to do with your specific playthrough choices. There is no reason why a future Elder Scrolls novel set following The Infernal City couldn't make reference to the Hero of Kvatch as being Dunmer or Imperial, Mage or Warrior, born with a particular birthsign, or having been the Arena Grand Champion, involved with the Dark Brotherhood, for example, or the Mage's Guild or not at all. At the same time, you could have made entirely different choices during your playthrough.
And since the in-game books were written by ancient authors who were not always correct (as discussed in the Skyrim Behind the Scenes video), the in-game lore can even conflict with itself.