Daggerfall and Morrowind had a quite different spirit, it was not a case of incremental improvement but a change of philosophy, hence they appeal to different (although overlapping) sets of people.
Daggerfall was one of the most ambitious open world games ever created. It had an enormous world, the size of Great Britain, with over 15,000 towns and dungeons to explore and tons of quests that would be randomly parameterized with towns, buildings, dungeons and NPCs. The world was procedurally generated once, and stored into the game, so everyone sees the same towns and dungeons. The game play was totally open, to the extent that many Daggerfall fans don't care much about the main quest (even though the main quest story was actually top notch, with lots of twists, treason, meaningful choice and all). Why have a main quest when you can just live your life setting your own goals: advancing in the various guilds, striving to buy a big house, a boat, to become a famous knight, etc. The dungeons were also procedurally generated, and so labyrinthine that you could literally spend hours exploring a single dungeon. This is something that some people hated about the game (I actually love it. It was deeply immersive, and the feeling of finally getting back to the surface and hearing crickets was amazing). The character creation system was more oriented to role-playing (you could do things like give your character specific advantages or disadvantages) than to game balance. You could even make your own spells!
Morrowind continued the saga in terms of lore and mechanics, but took a totally different turn. The world was hand-crafted, so it was more carefully put together, but also much smaller. And the open-world nature was very much toned down. You were now "the Chosen One" (in Daggerfall you were just a random person, except for being a friend of the emperor, living their life and trying to make fortune) and you pretty much had to follow the main quest because there weren't that many things to do on the side compared to Daggerfall. The labyrinthine dungeons were replaced by quite linear dungeons (although less so than in later installments of the saga). Roleplaying-oriented features like advantages and disadvantages on character creation, questions to determine character background, etc. were removed.
Don't get me wrong, I love Morrowind too, as well as Oblivion and Skyrim, and even Arena. I have enjoyed all of them a lot. But Daggerfall was a unique beast and scratched itches that no other game did. I understand that it's not for everyone, many people hate it. It's one of the most polarizing games I have ever seen, a case of "love it or hate it". Exploring dungeons requires a lot of patience which many people just don't have, and the procedurally-generated nature (with 1996 technology) means that it isn't as fleshed out as other games - for example towns can feel quite repetitive, etc., you have to use the imagination a bit to imagine how each place is unique. Also, the fact that it was very buggy (although it improved a lot with patches, and Daggerfall Unity will hopefully be very stable as it's remade from scratch) alienated some players. But for the kind of player who seeks primarily immersion, the kind of player who actually roleplays, it's an unparalleled wonder because it lets you be whoever you want to be much better than the later games, which take you through the story on rails. Daggerfall feels like a real world, a simulation of a life in a fantasy land, and the emergent behavior caused by quests, reputations, etc. is often amazing. While the subsequent games in the saga are masterpieces in their own right, I long for a game in the spirit of Daggerfall with current (or at least later) technology.