The Arena was one of my favourite parts of Oblivion. It's definitely something i want to see again... just even bigger and better. And why stick to gladiator combat? Why not Jousting, fist fights, archery contests or perhaps even a fictional team sport unique to The Elder Scrolls, like Quiditch in the Harry Potter series.
5v5 everyone gets magical flying brooms, first team to cut off the heads of all their opponents and throw them into a bucket wins.