Alright, let me start off by saying that TESIV: Oblivion is the only installment I've actually played. I played about 10 minutes of Morrowind, but years after it first came out and the starting area put me off.
Now one thing I'd have thought would make Oblivion much more enjoyable is expanding the explorable area. In Tamriel alone (apparently there's at least one other continent) you have all these provinces surrounding Cyrodiil that are just beckoning for you to explore, but you're stuck on this side of the border. Allow players to go ANYWHERE they want to. If I overhear people in the street talking about the land of the Dunmer, I want to be able to hop on a horse and ride to Morrowind to see what they're talking about. I want to be able to ride North through the Jerall Mountains and visit Skyrim.
Of course in each of the different provinces, the ratio of race X to every other race should shift dramatically. Cryodiil is basically in the middle of all of them so as it stands it has mixture of every race, but Hammerfell should be predominantly Redguard and as someone else already mentioned races in different areas should be prejudice against certain other races/professions. Redguards don't really like mages, Khajit and Argonians don't really like each other, etc, etc.
I don't think the inclusion of other provinces should be done at the cost of having to shrink or simplify areas, either. I don't think game developers should really be afraid of using more than 1 disc for their games, like they seem to have been in recent years. As long as you're not making someone change the disc in their computer/console every time they go through a door into someone's house, I think most people could live with having to switch a disc as they pass a border between provinces. This would at least let you make each of those other provinces as large as Cyrodiil is now.
The leveling system really does need to be fixed. I think it's a common issue that practically everyone hates, because it doesn't feel like there's an adequate balance between working your ass off swinging a sword around and just jumping up and down on rocks. It's certainly a wonderful feature that leveling your characters is not strictly bound to killing creatures, but it doesn't really feel like you get much benefit for leveling up some skills. Why level security, when someone who's had enough practice can pick a very hard lock flawlessly at a level of 1? A Novice in security should have a different perspective of the lock tumblers, or have some obscured, or actually have some incentive to progress through the security levels to actually be able to pick locks easier.
Locational damage would add a lot more realism. As another said, hitting someone hard in the face with a sword should split their skull in half, not do nothing. Nailing someone in the arm with an arrow should make them drop whatever they were holding in that hand, or at least have them stop and try to pull the arrow out/snap it off. Slashing a running enemy across the back of the calves should have them drop to the floor and try to pull themselves away. Little things like this would add a lot of strategy and realism to the combat system and actually reward accuracy of blows, or aim with an arrow. On that train of thoughts, I'm a big fan of stealth-kills in games. If I can sneak up behind someone I should be able to slit their throat for an instant kill, not only get a damage modifier to my first attack. I suppose the largest point would be to make enemies vulnerable, not have a frail beggar easily soak up an axe blow to the nose.
Living economies help realism greatly. Rather than merchants having a fixed amount of gold to buy things with, they start out with a sum that increases or decreases whether they're buying things from your or you're buying from them. If you spend 4,000 gold in a store, that owner should be 4,000 gold the richer, and be able to spend 4,000 gold more on buying items from you. There's a mod that adds this into Oblivion but as mentioned, mods shouldn't be required. Having the option to find actually own your own store and profit from it as your source of income is also a wonderful idea, as you'd either have to sacrifice your time to running the counter or you'd have to budget hiring someone to run the store for you while you're off adventuring.
Someone's suggestion about having the option of ignoring the main storyline entirely if that's what you choose to do is excellent. One mod I installed for Oblivion has you arrive on a boat in Anvil instead of start in the Imperial Prison, and it's only when you actually travel to the Imperial City and get yourself arrested that the main quest begins. I had already gone and started my progression in the Mage's Guild before I actually had to go and bother with the starting dungeon and watching Uriel die.
Linearity is bad. If you don't force an event to happen only one way, and have the option of things working out differently, then there's so much more gameplay and enjoyability to the game. Having your character freeze when Uriel gets jacked really was stupid, you can even stand in the alcove that the Mythic Dawn member comes out of and he'll push you out of the way before killing the Emperor. There should have been absolutely no reason I couldn't have at least attacked him and tried to hold him off until Baurus could come help.
From the sounds of it, TESV is probably going to be the last installment in the story if it's even made, so there shouldn't really be any worries of "We need to make sure by the conclusion of the game that event X has happened." Just let the player have free reign over the plot. If I can save Emperor Uriel Septim and he survives the Mythic Dawn attack in the sewer, let me have the option of joining the Blades and defending Uriel inside Cloud Ruler Temple at the Mythic Dawn still try to assassinate him. Or let me not give a crap and go off to do something entirely different while the Mythic Dawn plot still unfolds in the world without my intervention. So no one saves the Emperor, the Mythic Dawn get the amulet, Kvatch is totaled and Martin is killed, Daedra overrun all of Cyrodiil and things turn out bad. Let them.
Oh, and forcing people to go through that long ass freaking tutorial dungeon every single time they start a new game is a HORRIBLE idea. Yeah, it's part of the quest that you've got to find another way through to meet up with the Emperor again, but it's so long and boring and trivial that it's off-putting. Give players the option of staying in their jail-cell if they want, or persuade Baurus to let you come with them from the start rather than locking you out of the door. Give alternatives that reward understanding of the game mechanics and past experience, as it adds so much more to replay value.
I think a lot of the basics are there in Oblivion as is, I love being able to forget about the Mythic Dawn and go off to do my own thing, with that quest-line still being there when I feel like doing some more of it, but I think it would be more immersive if they progressed regardless of my involvement. The Emperor tells me to take the amulet to Jauffre, I should be able to forget about doing so and have the Mythic Dawn start coming after ME. I should be able to ignore the Mage's Guild quests and further on in the game in the periphery of my involvement Mannimarco is ruining crap.
Non-linearity, immersion, and realism are all things I love in video games. With the astonishing start Oblivion gave, I think expanding and fixing any minor flaws would make an even more wonderful game.
This also turned into a really long drawn out rant, after simply having stumbled into this thread from watching Zero-Punctuation.
