I want to offer one point of clarification to Thomas' post: the Uncanny Valley is not a theory and has no scientific support. This is the focus of a presentation I am doing at an academic conference next month, by the way. It is also the statement by Cynthia Breazeal of MIT's Personal Robots Group, a woman who has devoted her life to creating social robots as human companions. However, what happened when Dr. Masahiro Mori proposed the concept of the Uncanny Valley back in the 1970s was that it was taken literally hook, line, and sinker by pretty much everyone, including both the general public and various researchers and inventors. It's a lack of critical thinking. In fact, Dr. Mori also stated that everything has a spirit and life energy (in keeping with Shinto and Buddhist philosophies) but people seemed to ignore that statement and associated concept(s). Dr. Mori has also stated that he never did any research to study the concept after proposing it. It was merely a hypothesis, nothing more. I can offer academic sources, but that would go way off topic. I only want to offer people the info. In relation to what Thomas posted, the problem is actually within any individual who views various elements and the expectations such an individual places on the elements, not any issue with the elements themselves.
Anyway, back to the main topic.

As an RPG, Oblivion is a disappointment, at least out of the box. Why? Because you cannot role play a character when activities you request the character to do depend on your skill rather than the character's skill. Even for actors in real life, role playing a character requires them to avoid their own personal skills and behave in a way appropriate for the character(s) they are playing.
Oblivion was a failure for character aesthetics, but that's normal for Western games due to the misguided idea that the Uncanny Valley exists and the constant focus on "realistic" rather than "appealing" visual looks and character behavior traits. Morrowind and most Western games suffer from this problem. This is a mistake for many reasons, not the least of which (as Thomas also pointed out) that "reality" is around us, but I'd also add that "reality" is purely subjective perception and varies with each individual. That is why diversity is a good thing, but Western game development does not embrace diversity. Instead, there is a constant attempt to focus on what the entire global game consumer market wants, and the idea is that people want "realistic" characters. No, many people do not want that, and that's why mods are essential and very popular. Heck, you don't even need to consider the entire character to see the problem. Just consider the hair and how Western game characters pretty much always use hair that is very unattractive at best, and often looks like a big blob of glop pasted onto someone's head. There's also the common lack of allowing custom colorization and lack of detail showing individual strands, etc... and of course, heaven forbid we actually allow hair to MOVE in the wind or with body movements! Meanwhile, characters in many East Asian games frequently have very detailed hair, and even short hair can be seen to move in the wind or with character movements in game. I find it interesting that Disney reported taking 2-3 years to do Rapunzel's hair, but Japanese artists seem to do such things in far less time as a simple matter of course for characters (just watch Hatsune Miku's live concerts for one example, or check out hair in Star Ocean: The Last Hope).
Oblivion was successful for environment, but Beth is a master of outdoor environments (not so much so for indoor, although they are usually pretty good, at least). Since this is their main area of excellence, this is expected. Thomas' comments are true, but I think that Beth did the environment in Cyrodiil as they did very deliberately for several reasons, including the parallels with Western history.