The TV Tropes scale for linearity-to-openness could be useful for this topic. [http://tvtropes.org/pmwiki/pmwiki.php/Main/SlidingScaleOfLinearityVsOpenness]
As for why linearity is now viewed as a negative aspect of games, it's because there's been a large push for non-linear games (particularly in those which have a single-player campaign which lasts longer than ten hours or so). Started somewhere between GTA3 and Morrowind I think, which has then been reinforced with several major releases which thrive on the sandbox gameplay. This isn't to say linear games have done poorly in the last decade, but the vast majority of them probably do fall under the "ten hours or less" criteria (in regards to the single-player mode).
Still, there's a reason why linearity is viewed negatively in general for games. They're interactive entertainment; forbidding all manner of choice (or alternatively, making one choice so effective that any other choice else is pointless for the whole game) will make the game feel very repetitive, boring, and potentially even frustrating. No one likes to feel they're forced to do the same thing over and over and over again, games need at least some degree of variety (or sufficiently short length) to maintain the player's interest.
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Using the TV Tropes scale linked above, you want any game in the modern era to be at least level 2. That's still predominantly linear, but it allows for the occassional detour as well as the choice of multiple paths in several sections of the game. The vast majority of action games, particularly those of the FPS or Hack-&-Slash genres, are level 2. Obvious examples being the Halo and God of War series, and all of the entries for those series tend to be rather short (usually 7-10 hours, but occassionally they'll creep up to about 15 hours). Just to note, level 1 is the "zero choice, ever" option.
The ideal level for most games these days is probably either 4 or 5, both levels being quite heavy on the choice but still posessing something which could be considered a central narrative. Level 4 still has a strong central story which needs to be completed, but there's a great deal of choice for how you get to that ending; it's also where you'll tend to find some of the better known franchises, including Nintendo's acclaimed Legend of Zelda & Metroid. Level 5 is probably moreso marked by having divergent storylines, where your choices actually affect the actual outcome; in other words, multiple endings. This is where you'll find most of Bioware's RPGs (Dragon Age seems to fall into level 4, but it's probably a borderline 5 in any case), along with most sandbox titles like The Elder Scrolls series and Grand Theft Auto series.
Level 6 is more or less much reserved for MMOs, where the central storyline ranges from non-existent to predominantly ignored. In most cases where there is a storyline, the player's choices don't really affect the outcome, they're just participants... which almost seems to be moreso a level 1 game, now that I think about it. Still, the player has a great deal of choice; those choices simply don't affect the storyline to a large extent, which more or less allows them to whatever the hell they want. The main reason for why level 6 games aren't ideal is because they're too large a risk for most developpers (HUGE initial investment) and prone to failure; WoW's success is actually a major cause of this, seems no one can really compete with Blizzard's juggernaut.
Having gone through the rest of the levels, there's the plight of the level 3 game. In the vast majority of cases, these are the long & linear story-driven RPGs. Square's renowned Final Fantasy series mostly falls into this level, though the full range of the series is 2-5. They don't present the multiple endings of level 5, and don't quite have the same amount of exploration of level 4. However, they're too long to get away with the linearity games in the action genre can. While these games can do reasonably well, they are probably the ones which are the most dependent on the quality of their storyline; the gameplay will almost inevitably get old and the lack of choice in the storyline has to be overcome by getting the player to simply continue in order to see what happens next, the latter of which is easier said than done due to other games placing a great value in choice.
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Is linearity a bad thing in games? Only if the player feels constrained by it (level 1). Everything else is fair game, though the current trends in game design are towards choice (especially in longer games, such as those seen in the RPG genre).
