I thought the Arena was the worst part of Oblivion. It just felt so tacked on, it's armours looked absurd, and it's 'story' was almost nonexistent. At least in Morrowind, the Vivec Arena was a platform for political duels, but in Oblivion it was just... There for it's own sake.
I wouldn't be against it returning, but it needs some serious work to fit into the world, let alone be something i would consider interesting or even fun.
wait, why would the arena need a storyline? it's fighting and killing for fame and glory, not a WWE drama.
it's part of the culture that imperials are violent and bloodthirsty for entertainment. even more so as there is no auditorums for any other cultural activities haha.
Hence part of the problem. The Arena could have been an interesting element of just random fights, a literal blood sport of just trying to make money from the dismemberment of others. But instead they tacked on a really weak 'underdog' story and the whole Pale Prince thing.
For general suggestion on future TES games, use this thread: http://www.gamesas.com/topic/1604490-official-beyond-skyrim-tes-vi-84/
And for discussing any multiplayer/co-op ideas, use this thread: http://www.gamesas.com/topic/1542890-non-mmo-tes-multiplayerco-op-thread/