Let me first say I am having fun with Diablo 3 at the moment... and this is because of dungeon crawling with friends and chatting on Mumble as I do so. Diablo 3 captures the more or less "mindless" fun experience that the others had. I like many of the changes and additions and so far I like the mix of the classes and how their abilities can work together in groups. So keep that in mind while I breakdown what I see as the deficiencies of Diablo 3.
I really don't think the AH is the cause of D3's problems... it's just a symptom IMO:
1. Everything that drops is 5 levels below where you currently are as you level. This changes at 60 when with 5 Nephalem buff stacks, you get a mix of 55 items and actual level 60 items in Hell difficulty. In D2 it was common for me to have something drop and I needed to compare it to an existing similar item I had equipped and decide whether I wanted to use it immediately or not. Especially once I had all rare items equipped.
2. The Legendary items simply are not. They're always a let down. Want proof? Go to the auction house... ignoring price, compare the rare items to an equivalent level legendary. You'll always be able to find a rare that is better. In D2, it was also true that rares could be better than a unique (legendary)... but these items were really rare. Super rare. But better than legendary is very common in D3 actually. In D2 I used to have targeted unique items I wanted as part of a list. If a unique dropped I was ecstatic, especially one from my special list. I'd started leveling classes because of specific uniques I found while looking for other things.
3. Legendary items are too generic. They need to be reshuffled with benefiting specific classes in mind... some do, most don't. Uniques had bonuses you could not get on a rare as well... or bonuses in an armor slot that normally could not be had... and noticeable bonuses to specific spells. And I know they don't have runes or runewords (saved intentionally for an expansion no doubt), but these were buildable uniques that one could build goals around.
4. Its like they've ignored or abandoned the concept of allowing players to establish mini-goals... D2 had this in spades... and it was fueled by there essentially being no level cap (yeah I know 99... but not really realistic), no limit to the level of a spell (+X to All Skills items were coveted!). Even with their Nephalem buff concept (which is fine, I like the idea to push people away from super repetitive Meph runs that D2 had, as is I can treasure hunt any act really), but in the next patch they're already reducing the drops that bosses give and spreading that among elites encounters randomly in the word... their reasoning? They don't want you to necessarily stop at a boss. But step in the mind of a player: killing a boss in a treasure hunting run is how I am going to plan to end my run... it's the goal!
It's like the designers of the game are picturing all players sitting and playing through all four acts everytime, each session. Diablo is supposed to be that game you can drop into when you have 30-60 mins to kill and you can roll the dice on a quick magic find run. Feels like Blizzard is actively designing this mindset/playstyle out IMO.