Yeah my settings are the same, I don't change anything just drag the items in.
This is what I get most of the time: http://i49.tinypic.com/6r4zth.jpg
Tinkering with the settings sometimes some objects will pop through, maybe it's just buggy as hell, even on yours 9000 of them weren't generated due to bounds. And i agree with the painting on thing was actually thinking of that a while ago
Yeah, I'm pretty sure that Bethesda did not use it. Manual terrain texture/color painting works pretty good if you set ugridstoload to something like 20, but I have no idea how they placed the vegetation/rocks. I'm pretty sure they didn't use the region generator, because the placement of rocks and trees is very deliberate in most places, none of their regions have objects enabled, and aside from apparently being buggy as hell, it always takes a very long time. A 10x10 cell region with just a few terrain textures only takes 10-20 seconds, but that time becomes like 10 times as long if there are several objects, and generating objects for thousands of cells would take many hours.
At the same time, I can't imagine them placing every single tree and rock in the game world by dragging it into place either, so I wonder if they generate the objects with a different program/feature we don't have, or if there's a better way to do it that we're missing.
One thing I notice in your screenshot is: It looks like you clicked "generate now", but I right-clicked on the region area and selected "generate objects for area 1" instead. I don't know why that would make a difference, but you can try it.