I think there's more than enough selective memory to go around here
Skyrim absolutely has life outside the player. In fact, I can tell you exactly where the spawn points are. Walk around this corner and you might see a hunter tracking game, Vigilants of Stendarr fighting off skeletons, a fire mage and an ice mage duelling, etc. Walk into Whiterun and listen to the rich farmer dude questioning the quality of poor meat merchant's selections and so on.
By the same token, Morrowind had a fair amount of stuff going on in the cities and town without mods (I know this not only because I remember, but because my son is playing it). There were random encounters on the road, but they weren't nearly as sophisticated as they were in Oblivion or Skyrim. I'm sure mods expanded on this, but the elements were there without them.
And I think most of the nostalgia for Morrowind has to do with the quality of the writing of the main quest
. I don't think anyone would argue that this was sorely lacking in Oblivion. My contention with Skyrim is that, while good, it fails to meet the high water mark set by Morrowind and utterly fails to dovetail with any of the other quest lines.