The thing is that despite it's brokenness Morrowind is flexible...
I do not want an awesome button and neither do I play games for instant gratification, and this is my main point: why would someone play Morrowind, or to put it more precisely, what does one get out of playing Morrowind.
Why I like RPGs and Strategy games is because they have a great deal of friction, they are hard to get into. RPGs require a great deal of time, but they also require you to figure things out, either the systems, puzzles or sometimes even the mere interface, and are rarely designed for this process to unfold naturally through thoughtless experience or simple interaction. As example, Icewind Dale has a great deal of friction whilst Super Meat Boy has none.
What I desire when playing a video game is the same thing I desire from a book, film or any other largely passive form of entetainment: I want my brain tickled. With this in mind, what would I get out of Morrowind?
We all do things for a reason and too often the reason pleasure is derived from a video game is entirely ignored. It's hard to know what you want, but if you have encountered something you desire then you ought to be able to understand why you do so, keeping in mind that as human beings we spend most of our lives filling holes we usually dug ourselves. If you stop to consider what you are actually doing in a video game the activity is absurd if not entirely pointless.
What you describe is extrinsically larping, not actually, just extrinsically--like P&P gaming, which I consider myself mightily partial to, but only 'like'. To elaborate: in a P&P game rules are arbitrarily followed, they are laid down in the imagination, really, and form a kind of alternate reality; however, in a game like Morrowind you have a similar situation except that the imagination of the player is restricted by the limits of the game, it is after all a video game and not an arbitrary construct from your own imagination.
When I play a video game I want to figure something out. Preferably I want to figure out how to deal with some foreign construct, such as a ruleset, which is why I am drawn to RPGs and Strategy games. I'll admit I am rubbish at them, which is somewhat to my benefit since my inferior brain can then enjoy figuring out systems as low-brow--if you will--as Europa Universalis or Albion.
My problem with Morrowind is that I was somewhat enjoying it but began enjoying it less and less after the first few hours when I discovered how broken the system was. The whole thing is fraught with exploit and balance issues. To understand the game was to break it. My grief with Morrowind may here become apparent, as I played the game it came to be that whenever I found something out it was usually an exploit (something so over-powered or cheap that it could not have been left in the game on purpose) or a possible glitch, and it trivialized the game and mangled whatever sense of a plausible world the game was able to sustain in me. When I find these things in a game I use them, to not use them is a thing I do not understand, it would be like not skiing in Tribes. If I want to play tassle-fancy with my imagination I do pixel art or write a story no one will ever read, I do not play Morrowind and roleplay by myself.
I say roleplay, for what else is it. I do not think anyone in this thread has argued that the combat engine of Morrowind is anything short of irrelevant or dismal. Considering that the two things you do the most in Morrowind is fighting and running, restricting yourself from fully utilizing the game's system seems to do little but extend the difficulty of handling the two worst things about Morrowind.
Exploration appears to be what most Morrowind-fanciers deem the element which makes the game a grand old thing. I do not think I can precisely argue this because some degree of nostalgia may be attached to the graphics. The graphics do not do Morrowind a disservice but I don't find it does it much good either, fair to say that visual exploration is not something I appreciate. I hear Skyrim-fanciers are all about it, but I've seen Skyrim--briefly played it on someone else's super computer with sparkly graphics even--and I don't get it; Morrowind is about as aesthetically interesting to me.
So we are left with what I will daringly, but far from charmingly, refer to as 'contextual exploration', for lack of a better term. What I mean to refer to with the term is that of exploration sparked or made interesting by the possibility or search for something with a context in the game, usually that of story or lore. I feel I must here mention that the thing I recall despising the most about Oblivion was how many special items they threw at you, Morrowind does not pander like this and it does not rely on the 'awesome button' game philosophy of Bioware and post-Morrowind-Bethesda where the player must constantly be thrown goodies and epic lutes to satisfy whatever twisted notion a player satisfied by this would be satisfying.
To get back on topic, loot in Morrowind carried no interest to me. I had no interest in the story, world or lore no matter my attempts at investing myself in it, and so, loot aside, what contextual value the dungeons and side-tracks had would not find purchase with my kind.
What remains is the lore and the story, the quality of which I won't get into, I will simply claim once more that I read the books and I read the text nodes, and I just don't get it (what makes it good or interesting that is); then again, I was never much for literary fiction, let alone fantasy fiction. As the concept of narrative goes I just want to make it clear I was speaking of video game narrative which is an unrefined concept that is very distinct from the narrative styles of literature or film, its the reason cutscenes are vilified. A video game narrative is one that uses the video game to tell a story, or to somehow narrate it, it is a fairly abstract idea done well in very few games. No need to get into it because this post will be long enough and by thinking on it for a wee while you may well come to grasp what I mean by it.
The point from all this stands: to derive enjoyment, whatever the word may mean to you, from Morrowind you must enjoy the lore and the story. The points you and others mention seem reliant on it. The first time I played the game I tried getting caught up in it, there was so much to read I simply felt obliged to attempt it, but failing to do so I was left trying to look at it from other peoples' perspective, but to no avail. Adding to this the reason I play video games, it is not wonder I find Morrowind fairly detestable. I feel I ought to repeat that I don't like Morrowind because it does nothing for me. It is not a matter of taste but of intention.
I've asked this question many times, Skittles interpreted it as me wanting to be persuaded to like Morrowind, but I'll repeat, plainly once again, that this is not the case. I simply want people who like Morrowind to explain to me why they do so; not what they like, why they like it--what they get out of it. No one has to, I am sure some may be incensed by this post. Just remember that if you find yourself getting hot-headed by reading this then take a day or two off and return. If you still care after that then you may be able to write something out that is not merely an emotional reaction (not to imply that DraQ was under such an influence when he wrote his post).
for sentiment and points about DF an MW... there were no actions games with few scripted Persauassion Checks like Skyrim.... OK have to drive to school. 
