I would definitely say technological advances are no longer as groundbreaking (and thereby capable of making older tech obsolete quickly) as they used to be. What happened in the 90s? Let's see, we had a jump from 16-color EGA to full stunning 256 color VGA. DOOM which was one of the first 2.5D engines. We had Quake, one of the first truly 3D engines (that didn't chug along at 5FPS, like http://en.wikipedia.org/wiki/Freescape did). The jump from MIDI to Redbook Audio to embedded MP3 playing. Dynamic light? Reflections? Shadows? Amazing stuff.
What do you think of when you hear "graphical advances" nowadays? Pretty much everything within the realm of not-absurdly-realistic has been accomplished already. You hear John Carmack brag about his 128000?128000 megatextures. Valve flaunts their constantly improving facial animation techniques and realistic particle systems. Almost everybody can't wait to talk about how their next game has models with 1.5x as many polygons as that of their previous, as well. But it's nothing new - just improvements.
Daggerfall is 10 years older than Oblivion, but Oblivion's graphics are amazing and Daggerfall's aren't even good(for this time), but it was only 10 years.
Priorities. Yes, Daggerfall's graphics left something to be desired, but Daggerfall also had precipitation systems, dynamic light, rendering of large open areas, and many other things that other engines at the time (such as Quake's) could only dream of processing.
Until the advent of DirectX and the popularity of Windows machines, computer technology wasn't very unified. There were so many different types of processors, display adapters, and sound cards - it was a real mess, and thusly it was very difficult to get games back then to work on everybody's machine. Nowadays when people think of processors they're comparing Intel and AMD. Back then, pretty much every computing industry was involved in hardware production in one way or another, with little desire to be particularly compatible/modular with others. IBM, Compaq, etc. Sound cards? Gravis, Roland, Creative Labs, you name it. Since this was in ye olden days of FM-synth, there was also an actual substantial difference between each of these, in actual quality of sound and synthesizers utilized.
Without any graphics at all, there is no game. It's true, and as graphics get better, the game is presented even better.
I agree wholeheartedly. Features such as the ability to consume food/drink that had no effect on you in Arena and Daggerfall make it evident that the Elder Scrolls series has its deepest roots in PnP RPGs. I have almost every reason to believe, especially given the procedural generation used by these games, that Bethesda's intention was for you to play the game, yes, admire the scenery, yes, but you were to fill in the blanks left by technological limitation with your imagination.
The games are games, yes, but first and foremost, they are visual proxy to help your own imagination along and to assist in visualizing your actions upon the world. I still hold this to be somewhat true.