I'd like to see different languages in the next TES. I understand Daggerfall had langauges but having never played it, I'm not sure how it worked. However here is how I would see a language skill working:
My lores not perfect, but I would assume Cyrodiilic is spoken to some extent in most provinces, what with the far reaching Cyrodiilic Empire - the player would be given fluency in this language right from the off, so as to be able to communicate with most NPC's with it, who at least have a basic understanding of the language. It would also make sense to give the player fluency in their native language according to their race - I'm not sure how to implement this without putting Imperials at a disadvantage, as Cyrodiilic is obviously their native tongue. Perhaps they would get a choice of a different language as an extra, or receive extra bounuses when talking to a fellow Imperial. Also, if Speechcraft is chosen as a major skill, the player gains one extra fluency of their choice. So, the player has potentially three languages at the start of the game, and all other languages must be learnt.
Learning languages could be done by reading books or visiting teachers, there could also possibly be spells which translate what another character is saying, or the possibility to hire a translator to speak for you. The player should learn the language in stages - for example, basic understanding, intermediate understanding, advanced understanding, fluent. Depending on your stage of understanding, less or more of the dialogue would have a translation.
While most NPC's will know Cyrodiilic, there should also be large communities who's Cyrodiilic is very limited or non-existent. When talking to these characters without the knowledge of their language, there would be no subtitles and the spoken words would obviously be foreign. Once the language is learnt, however, the speech would still be alien but the subtitles would be a translation. It should be necessary for the completion of some quests to learn a foreign langauge in order to talk to a certain individual. The player should be able to play comfortably enough without learning all the langauges, but to open certain areas of the game the languages should be necessary.
Languages could also be useful while speaking to Cyrodiilic-fluent characters, gaining large disposition bonuses for addressing them in their native tongue.
As well as adding depth to the players interactions with other characters, this would add a good amount of depth to the game world. Imagine a large Nordish city with a dark elf sector, where few or none of the residents can speak anything but Elvish (or whatever Morrowind's native language is.) This would create a very definitive dividing line between the cultures, and possibly make the player very wary of wandering into this alien sector with the strange elves who talk in gibberish. Or maybe the player will feel more at home there, depending on the race. It would certainly add a lot of intrigue and tension between the cultures, with loads of quest opportunities based on the two races mistrust of one another due to their common inability to intercommunicate.