Here it comes. Well actually it's really more of a mash up of posts I've made on the subject run together so if it seems poorly organized, it's because there is no organization.
Main Plot/Writing
Morrowind had much better writing than Oblivion. (Some spoilers ahead) The problem I had with Oblivion was that the writing was so uninspired, like they spent all their time on the engine and making the game look cool and then all of a sudden thought, oh crap we forgot the player has to be doing something. So we get the daedric prince of destruction coming to destroy the world because...some cult wants him to? The only person who can stop him is the priest of Kvatch who happens to be the illegitimate son of the Emperor who needs to get the amulet and use it to banish the evil back to where it came. It lacked a lot of substance and the player wasn't the hero of the story. Martin was, you do all the work and get a cool statue and armor but after that things were just the same as ever and it didn't have a big sense of accomplishment to it. Morrowind on the other hand really did an excellent job in creating this fantasy world where you initially seem inconsequential and then become the central figure of the story. You weren't just solving Vvardenfell's problems, they were your problems, and you don't even know you have them when the game first begins. Overtime you see this transformation of your character from prisoner to hero, along the way people doubt you, some even hate you, and even after you save the day some people still don't like you as you represent a part of dunmer history that some wish to stay dead. It was awesome and it made all the mundane tasks you do seem less like quests and more like stepping stones on the way to completing this transformation. It's the difference between closing Oblivion gates to make the big battle easier to traveling to a remote island to contract an incurable disease because it's something your character was destined to do.
World
Cyrodil in 2006 was the most amazing gorgeous scenery anyone had experienced in a while. It had dense forests, farmland, snowy mountains, a big city, towns, villages, crumbling fortresses, dungeons, caves. At first glance it seemed the perfect location for a fantasy adventure. It wasn't bad either, the problem was while the game was very pretty, it lacked a lot of character. The world never really felt like locations were unique. Each town had its own architecture but it didn't mean anything to the game. So the houses in Bruma are all halfway into the ground to conserve heat. Ok? That's not as important as say walking into a town in Morrowind and immediately being able to identify what Great House has the most prominence there just by looking at the architecture. The Telvanni towns had giant tendrils growing out of the ground or like in Vos tearing their way through the walls of an Imperial fort leaving giant holes. Those same tendrils made up the towers of wizards that could only be accessed by levitation ensuring that those they deemed beneath them who couldn't master magic would in theory be kept out. Each Great House had its own ****of bonemold armor, their own unique helmets. The councilmen hated their peers as much as they hated the other houses. They felt like real organizations who's actions had real weight in the world. The other factions were better designed as well. The temple who were based on Israeli temple culture, the Imperials and their distinctly roman occupation force, the East Empire Company were like real world mercantile organizations like the British East India Company. These all drew heavily from real world counterparts but rather than diminish the fantasy it actually gave these organizations some grounding in the world.
Gameplay
This area probably is the place that is most argued about. Which game was more fun. Both games are broken. Speechcraft in Morrowind is useless. Even at 100 skill you will still repeatedly fail speech checks over and over and over. The only thing it's useful for is taunting someone to try and kill you anyway so you can murder them without penalty. Everything else is easier to just use a bribe. Morrowind's sneaking was also faulty. It worked but in the old cRPG way that was illogical and entirely reliant on stats. This is the one area where I will say Oblivion did better, stealth in Oblivion actually seemed to be based on both your actions as a player and your skill level. Oblivion's combat was broken and magic was terrible. To address combat both games used a system of heavy repetition, Morrowind because you would often miss due to failing a hit check until higher levels and Oblivion because the leveled monster encounters meant each battle was a tedium of slowly hacking 1-2-3, block, strong attack, 1-2-3. This was my biggest gripe with Oblivion. Combat stats seemed to mean nothing. So what if you've got 100 skill in blade, by that time enemies will be strong enough that combat will feel identical to what you went through at level one. My character never seemed to progress and some skills like security were useless from the start because the minigame is so easy to complete. There is absolutely no reason to make security a major skill (Fallout 3 fixed this mind you by making locked objects require a skill check to attempt, something also present in Morrowind, and I presume this will probably be in the Elder Scrolls 5). The last thing I will mention is the compass and fast travel. I really think Morrowind nailed this and I don't know why they took this out. Fast travel existed but was limited and it was logical. You go to the silt strider or boat, you pay a fee, and it takes you to the one of the destinations listed and some hours pass. From there you can choose another destination to go further or travel on foot. It made travel easier while not entirely removing the need to actually seek things out. Oblivion did something awful by giving us quest markers. When I'm told to go down into the depths of a dungeon to find an artifact it takes a whole lot out of the adventure when I look on my compass or map and see a big green arrow pointing at an alcove with a chest saying "Here's that treasure you were looking for! Don't bother looking, and you can skip all those spooky hallways on the other side of the dungeon, they're just full of skeletons and low level loot drops, just come on over here, take it and leave" In Morrowind you were lucky if the NPC said here, I'll mark the location of the ancient ruin on your map. Usually they just gave you horrible directions like a real person would and you checked your journal and would look at the map and the road signs and then finally get pissed off and realize you were either lost or had taken a wrong turn because the directions were vague and you misinterpreted them, and you know what, it was great. Because when you finally found it, it's like the lost ruins of ******** Atlantis and you're going to pillage them.
Content
Oblivion cut down on a lot. Which really is kind of disappointing. To start in Morrowind you had the following armor slots.
-Helmet
-Left Pauldron
-Right Pauldron
-Cuirass
-Left gauntlet/bracer/glove
-Right gauntlet/bracer/glove
-Greaves
-Boots
Oblivion you had
-Helmet
-Cuirass
-Gloves
-Greaves
-Boots
What this meant was in Morrowind you would mix and match armor a lot, it added customization, as well as more variety. You could even wear clothes under armor, or robes and skirts over it. Argonians and Khajitts couldn't even wear boots or helmets because of the unique shape of their heads. Oblivion adjusted this by making all helmets open faced and giving them more humanoid features, it lacked personality.
Furthermore there were more spell types in Morrowind including an enchant skill. For combat there was long blade, short blade, blunt, hand-to-hand, axe, spear, and marksman. Marksmanship covered not only bows but also crossbows and throwing weapons like shurikens and throwing knives. There were many more armor types including subvariants of armor like imperial steel, imperial studded leather, imperial silver, imperial chainmail. Oblivion just felt really cut down and lacking inspiration.
You can become a vampire or a werewolf in Morrowind and there are related quests for both.
Then there are the factions. Note: The Blades and Sheogorath's Court (?) are technically factions but are parts of the main quest for both games and the Shivering Isles main quest respectively so they weren't included. Additionally mini-factions aren't included either as they're usually just a reward for completing a quest.
Morrowind:
Great House Redoran
Great House Telvanni
Great House Hlaalu
Fighters Guild
Mages Guild
Thieves Guild
Imperial Legion
Imperial Cult
Morag Tong
Tribunal Temple
East Empire Company
Oblivion:
Fighters Guild
Mages Guild
Thieves Guild
Dark Brotherhood
Arena
On its own I really don't feel like Oblivion is a bad game. Not at all. But coming from Morrowind it just felt really mediocre.
If you've played Morrowind or Daggerfall beforehand you'd see why Oblivion was such a massive disappointment. A lot of the design decisions might have seemed good on paper but were stupid in practice and ended up breaking the game worse than the original problem they sought to fix.
Major complaint in Morrowind: Game becomes too easy at high levels.
Solution in Oblivion: Revamp the leveled monster encounters to scale them almost exactly to the players abilities.
Major complaint in Oblivion: Monsters are scaled to the point where leveling up no longer has any meaning other than making the game more difficult. The game also fails to level some areas of the game to match this problem, like the final standoff with Martin and the militia at the Oblivion gate. The monsters are scaled to the player, but the guards are not, meaning the daedra wipe out the guards extremely fast leaving you to fend for yourself.
Major complaint in Morrowind: Combat system based on repetition and button mashing, hits only land based on skills, seems boring and unrealistic.
Solution in Oblivion: Revamp the combat system so every hit lands and a block key is added.
Major complaint in Oblivion: Combat system is extremely easy to exploit and combined with above leveling problems combat skills appear meaningless. Sure in Morrowind the combat was clunky and boring but at least your stats seemed to mean something.
Major complaint in Morrowind: Traveling is difficult and often players get lost trying to find quest objectives that aren't properly explained.
Solution in Oblivion: Implement a free fast travel system rather than fixed routes that have to be paid for and insert quest markers showing players the locations they need to go to on the map to complete quests.
Major complaint in Oblivion: Fast travel defeats the purpose of exploring the world and the game is built around it so "just don't use it" while a viable option is slow and tedious compared to Morrowind, even with a horse. Additionally the quest marker makes the game far too easy, the need to explore and experience the environment is removed almost entirely by a simple game mechanic.
Major complaint in Morrowind: NPC interaction feels sterile and repetitive.
Solution in Oblivion: Implement full voice acting, facial expressions, dynamic conversations, and lip syncing for all characters, as well as full night and day schedules.
Major complaint in Oblivion: NPC interaction feels sterile and repetitive, but now with annoying voice actors, and less conversation topics. Sure it's nice that every line is voiced, but when every nord male sounds exactly the same, and every dark elf female sounds exactly the same, it breaks the immersion. Additionally conversation topics have been reduced from around 10-20 to about 4. The dynamic conversation system is entirely broken with conversations happening such as:
"Hello!"
"I've heard [insert name] is quite the acrobat"
"Can you believe it? The emperor, killed!"
"Good bye!"
Furthermore the NPC schedules are nothing more than shop keepers going home to sleep every night and NPC's continue to wander aimlessly about town, something that we had in Morrowind.
Oblivion was mediocre.
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