Anyone ever played Lord of the Rings: Online? It has a pretty innovative music system, which features 37 musical notes. By default, only 24 of those notes are keymapped, and can be played by pressing the number keys 1-8, and then by pressing those same number keys while holding either Shift or Ctrl to change the octave.
There's also number of different instruments like flutes, lutes and clarinets. It really is quite something. http://www.youtube.com/watch?v=f4QMtvk4ihg&feature=related
If it's possible to play music in Skyrim, I hope it's similar to this. Only higher sound quality of course.
Also, I have to agree with you OP about Smoke on the Water.