You'd only be able to get a single octave out of a lute then. Even with sharps and flats, you'd only be able to play... say C4 (middle C) to C5 on a scale, even chromatically. If my option is a single octave, I'd prefer they leave out OoT's method.
I actually remember in OoT being able to play through a few different scales. I think it was the dpad that did it - you just tapped up when you wanted to go up, down when you wanted to go back down.
Granted, it was an incredibly convoluted and difficult way to play an instrument, but if you look up videos on youtube you can see people playing some cool things. What really held people back, though, was that playing certain notes in succession would trigger the various songs they were related to. Obviously that wouldn't be the case in Skyrim, since instruments wouldn't be used as vessels for getting around and solving puzzles, and as such wouldn't have pre-fixed "songs" to play.
And I actually like the fact that it's so unintuitive and complicated. It makes being a musician in the world of Skyrim an accomplishment, as it should be, right? : D