They had a great cast but unfortunately Peter Jackson got carried away and turned a small, charming story into a bloated, overblown CGI mess. Part of it was probably the studio telling him he had to draw it out into three movies so they'd make more money, but it never should have been more than two. The padding they added to the story didn't do anything to enhance it.
The sad thing is that they had such great actors, and great backstories for all the dwarves, but only three or four of them got anything to do and the rest were just background.
The 1977 Rankin/Bass cartoon version actually got a lot closer to the heart of the story and did it in only 90 minutes, even if they did make the elves blue.