Admittedly I haven't played much D3 (open the open beta), but AH complaints remind me of several other multiplayer RPGs I've experienced. There's just too many items for sale. Too much supply forces prices downward, and the result is that players can buy items in the AH long before their characters could have found similar gear by just playing the game. Half the game is basically an item hunt, though, so half the enjoyment just evaporates as the player continues to get item drops that are consistently below the quality of stuff he can afford in the AH.
This sort of phenomenon is almost inevitable. You can't reduce the quantity of item drops, because that's half the "fun" of the game. But if you want to fix the AH system then somehow you've got to tackle the supply-side glut.
IMO there needs to be a more compelling item sink than the existing crafting system. Maybe crappy items could be used as material components for high-powered skills ?