You have pretty much hit the issues: Airmatic suspension and electronics. Both have improved in later years.
The '00 S500 had an upper strut mount design that tended to crack, then leak. If you looked at it carefully, you could see cracks begin to develop in the paint, in the circular depressions molded into the mount (where the air hose and valve enter the strut). Time to replace it; the "seal kit" replacement was actually a replacement of both the metal upper mounts and the seals. I experienced this problem on my '00, and it cost me about $550 to fix.
Problems with the lower strut seals are less frequent, but like any wear point (including seals in hydraulic struts in spring suspensions), they do fail eventually.
Any leak in the system can run the Airmatic pump excessively and cause premature failure, of course. But more frequently, the early Airmatic relay was a problem. If it failed "on" it would burn out the Airmatic pump - a $900 repair. If it failed "off" the Airmatic system would gradually lose pressure (faster of course if there was a leak). This problem was (and is) common. Forum contributor Oddemann has indicated recently that the relay is now made by another supplier (Hella, I think) and is more reliable than in the past. About $35 from a parts house, $85 from a dealer.
If the Airmatic system loses all inflation, the car settles to a point where the tires can damage the wheel wells if the car is driven in that condition; and damage the fenders if the wheels are turned. That's about a $6000 repair job but is of course caused by the owner neglecting to act on the early indications of failure.
How frequent are the failures? I have no idea of the actual numbers. However, I had to have the front struts replaced on my '05 (under warranty, thankfully - normally a $2600 repair) for lower seal leaks. I have standard wheels and OE tires (as I had on the '00). Two out of two ('00 and '05) with good roads and only about 12K per year of normal driving isn't great - but then the Airmatic system is what gives the W220 its marvelous ride and handling.
I would say that Airmatic problems are fairly common and are the weakest design point of the car in terms of reliability. They can be expensive to fix. However, knowing what to look for early, and fixing it promptly, minimizes the costs. If I were to buy a '00 today I would 1) check that the upper front strut mounts were of the newer design, and 2) replace the Airmatic relay. Maybe replacing the relay is like snapping fingers to keep the elephants away, but the relay is inexpensive and addresses what seems to be the most common point of failure. Last, I'd have an independent mechanic check the Airmatic system for leaks.
I am not at all certain that the majority of problems with Airmatic are caused by oversized rims and abusive driving. These are a likely contributing factor in many of the complaints one sees on the forums, but certainly not all. But I also note that the air (rear) suspension on two of my wife's Lincoln Town Cars also developed leaks requiring expensive repair, and she is a cautious driver. Air is thinner than hydraulic fluid. It will leak through a smaller gap. (Duh). If you have an air suspension system, it's a fact of life.
Problems with a particular engine pulley (harmonic balancer) separating were addressed by a recall. The oil pan could be shattered if the pulley let go; but if the car has had all of its recalls and program bulletins taken care of, you should be OK.
Electronics problems did occur frequently in early models. COMMAND failures were largely handled under warranty with newer units. Firmware updates handled many of the audio dropout issues (and many owners failed to recognize that a short audio dropout was an indication of a waiting voice mail message on the cell phone; nothing like reading the owners' manuals). Door control failures (loss of window controls, locks, etc.) were often caused by water intrusion when folks tinted the windows. Early COMAND nav units are now outdated (Duh) and are often compared unfairly against more modern nav systems. People are frustrated that their car doesn't allow them to switch to the latest and greatest cell phone every 6 months. Guess what? No car does. Some just make it easier, and the newer UHI and MHI systems in Mercedes do that. There is a cell phone upgrade path for the 2000 and newer models, but like everything Mercedes, it is expensive. We may have had to figure it out for ourselves, but it can be done - and it makes upgrading to the "latest and greatest" every six months much easier.
I agree fully on the lack of "need" to update the headlights, tail lights, etc. ad nauseam. I updated my tail lights because some idiot cracked one with a grocery cart (also placing a basketball-sized dent in the back fender). My '00 was a beautifully styled car that I could appreciate, and I still take pleasure in seeing one go by (as several do regularly in my neighborhood). I like white front side marker covers on a silver car, so did that - but at night they're yellow, just like the originals. My HID OE headlights on the '00 were Xenon on low beam - just like my clear-lensed Bi-Xenon projector lamps on the '05. 99% of the time you drive on low beam - so they were the same, from a practical standpoint. Upgrade just wasn't worth the cost, and the OE '00-'02 is good-looking in its own right.
I do like the slightly stiffer suspension on my '05 4-Matic, which I drive in its softest ride setting; the mid-stiffness selection on the '00 was similar. Used to the Audi sport suspension, I guess. The ability to raise the front suspension by 3/4 of an inch is useful mainly to avoid bumper scraping backing out of parking.
The earlier W220s have some strong advocates (Jayhawk being one). Yes, they were more problematic than the predecessor W140. It was revolutionary in its styling, suspension, and electronics, compared to its predecessor. I loved the W220 sports sedan feel on stiffer settings, vice the very "heavy" feel of the w140. But there were problems initially; some linger, but at lesser rates. And, as MB tightened quality requirements for its parts suppliers, many of the replacement parts have been just fine. Dealers were not adequately prepared for the new systems in many cases, and many are still not today. You are correct that poor dealer service compounded the frustrations of early malfunctions. They still do in some places. We have the same problem with our local Lincoln dealership, too. But many dealerships have caught up, and do just fine.
Rust was a problem for some - in '03 MB went to a double-sided zinc treatment on the body. There is a warranty that is greater than the original mileage for rust (if it is in an undamaged area; rust from an accident-damaged area is not covered).
The initial instrument cluster recall for the W220 and CLS was replaced by an extended 10-year warranty (from date of initial service). Instrument cluster failure stems mainly from one or more of three different component malfunctions, but they are all covered.
I cannot give you any statistics on failure rates. MB had a marvelous reputation for reliability and long-lasting cars prior to the '00 W220. The early W220 failed to deliver to that same standard. People who went from the earlier cars to the newer were very disappointed with reliability, according to JD Power, Consumer Reports, and many other surveys. However, MB did address the problems, and did improve quality control. '03 was the first year the cars were built from scratch with the improved quality components - but don't forget, the improved components were also used as they became available in the '02 production year, and as replacement parts (e.g., the metal mounts for the front struts) for older cars. The quality trend continued annually, with the '07 W221 winning JD Powers' top initial quality rating in the luxury class - beating Lexus, of course. The '05 and '06 models are also not far off that mark.
Look carefully at any '00 you buy. Look at its service history; if a part failed repeatedly, but was finally fixed and has been good for a year or more, it finally got either 1) the quality replacement part or 2) a dealer who had caught up with the changes - or both. Be sure recalls and program mods have been taken care of. Check CarFax for accidents and look at the car for the same (rust, broken engine mounts, missing trim, etc). Have an independent check the Airmatic system for leaks (easy to do with soapy spray at the seals and hose connections). Look at the car's general condition - was it cared for, or abused?
Last, since you're buying a dealer's wife's car, perhaps he will give you a deal on an extended warrantee. Not sure he can certify it with 78K, but there are other warranty packages. Very few, if any, will go past 100,000 miles - but some protection is better than none. Best to get one that covers electronics as well as suspension.
If you like it buy it - and know you're driving a modern classic.