But I want to discuss the fundamental differences of the M&M and Elder Scrolls games and the effects of those differences on game design and gameplay. I don't want to discuss whether one aproach is better than the other; that's going to be a matter of personal taste.

Here's a (partial, I'm sure) list of the important differences as I see them:

party-based v single character
promotion trainers v fixed/automatic promotion levels
race & starting attributes v race, sign, starting attributes & Major Skills
allotable Skill Points v leveling by Skill usage
fixed monsters v 'leveled' monsters

So, for example, whereas it really doesn't matter if you're using 2D sprites or 3D models, it matters a lot if the game is party-based or single-character-based. The different party members will probably need different promotion paths, and this can create challenges if the party as a whole is aligned with a particular faction (eg, Dragons v Dragon Hunters in MM8). Yes, you can align your character with a particular faction in Oblivion, but it won't effect your character's advancement.

The only effective way to steer your character's development in Oblivion is to use the Skills you want to improve -- even though this might not be strategicly advantagous at the time. For example, if you want to improve your Skill in Blade in Oblivion then you have to fight melee. In M&M you use Skill Points earned at leveling up to advance Skills you choose based on what you expect will be helpful in the future.

But the key difference in the two approaches (as I see it) is the leveling system. In both games you are allowed to level up after gaining enough experience, but in M&M you pay to level up and gain SP to advance your Skills. In Oblivion your Skills advance as you use them, you level up for free and you raise your Attributes based on your Skill advancement.

Character creation is more intricate in Oblivion, but the most important difference is the selection of the 'Major Skills'. These are the skills whose advancement governs your character's opportunity to level up. Weak choices here can have an unpleasant and lasting effect on the game, but wise choices permit your character to develop in a way comsistant with your playing style.

Although very knowledgable players can play a M&M game without leveling, the games were designed so most players need to level up in order to progress. If a dungeon or area is too hard then you come back when you're stronger. The leveled monsters in Oblivion means that the game adapts a most locales to the level of the player. Treasure is also leveled, so if you want cooler treasure then you'll need to level up and face tougher monsters. But the leveling of monsters is what allows Oblivion to be so amazingly vast. One can wander the game freely from the very start and only rarely face unbeatable situations, and hence every game can unfold completely differently.