The trade-off was more original quests,
Nearly every questline in Oblivion was good vs evil.
improved stealth/combat systems,
Stealth, I agree with, but combat? That depends on how much you like traditional RPG's. Character skill is far better than player skill in an RPG.
actually learning by use,
What?
actually retaining a challenge at higher levels,
Every random bandit in the game having super-rare, super-expensive glass armour and daedric weaponry is a good thing?
more interesting stories to the various factions,
I know that I far preferred Morrowind's quests about a corrupt Mage's guild leader was far more interesting than "Kill big bad necromancer".
a general more alive feeling,
AI =/= alive feeling. Most characters have no personality in Oblivion, because they have 3 topics. 10 max.
I don't believe I've ever saw you admit to some kind of bad direction Oblivion has taken. I've seen you, many times, calling people trolls and fan boys and flamers just because they prefer a system of Morrowind's though. Every game of Bethesda's, just like pretty much every other game out there, has some kind of problem. No game is perfect. Arena, Daggerfall, Morrowind, Oblivion, all have certain qualities that make them awesome, but all have immense problems.
Arena is very cliché and linear, Daggerfall is unnessecarily large and a tad too much randomisation is used, Morrowind is too small, and too buggy, Oblivion has tried to use many new aspects badly (AI, Voiced Dialogue, etc.).
On the other hand...
Arena is a great start to the series that lays out the basic lore of the series, Daggerfall really emphasizes the scale of Tamriel, and emphasizes corruption. Morrowind adds vastly to the lore, uses non-cliché themes amazingly and gave us control of the development tools. Oblivion improved on stealth, and lets me hide well and let's me have more control in facegen (though poorly implemented, imo) and gave us even more control of the development tools.
This is much of my problems and likes of each game. As you can see, none is perfect, but all have good qualities. Be willing to admit problems in the series, else we'll never be able to advance.
Anyway, this is straying far off topic. This isn't a Morrowind vs Oblivion topic, this is the complete opposite of that.