You hit the nail on the head. A TES title has not had that quality since Morrowind, and that one was borderline. In my own opinion, the thing that's missing is detail. With more detail, you get more options. Options make the world come alive, because you know that not everyone accomplished [this] the same way you did. Take thieving for instance. In Daggerfall, you could pick the lock on a door or chest if you had the skill. Or open it with magic, if you had that talent. Or bash it open with a sword if you had neither of those. The point is, there were numerous ways to go about accomplishing the goal of breaking-and-entering. And there were different consequences for the various choices.
The many times I played Daggerfall, with a wide variety of characters, I don't think I ever had a gaming experience within that game (or without it, to be honest) that came anywhere close to another time I had played.
I think the problem with many games these days is that they try to balance everything. The mage is just as powerful as the thief is just as powerful as the warrior, etc. That's not realistic. It's making the gaming experience cookie-cutter and lifeless. Some of my most enjoyable moments where when I was so close to dying in a fight and getting that lucky hit that saved my life. Three points of health and trying to find a safe place to rest, I had no idea of the real world outside my monitor. I was so immersed, if I had suddenly died at that moment, I think I would be playing Daggerfall for eternity. A real example of what I'm talking about is: The first character I rolled when I recently installed the old Daggerfall was spawned with a longsword which I couldn't use with any skill having taken expertise with short bades as a major skill and no skill for long blades. This is the first time I've ever had the game give me a blade I couldn't use. Still, I played through Privateer's Keep for three hours. That cave usually took me about a half hour way back when I was playing Daggerfall regularly, but that one little fact of having a weapon I wasn't skilled with made fights with things as lame as rats suddenly become life-threatening! I actually died by the bat at the top of the first staircase before the imp's room... and I was hooked on the game again.
If you can get around the fist-sized pixels, I would suggest downloading Daggerfall and DOSbox and playing through that game a bit. I think you'll find the same as I have - that graphics are the least important thing in a game.
Give me realism and a challenge!