Real Madrid wasn't bad as if they played horribly bad, but they were up against a far superior opponent. Even if you have a strong team on paper, in some years there are teams that are almost destined to win it and not many people had any doubts that last season Manchester City was overdue to win it. It was exactly the time when they peaked with their performance and the second leg was a lesson for Real Madrid against them. But that doesn't mean it will be the same this season. Everything is back to zero and regardless of the outcome of last season, Real Madrid is again one of the favorites for all three titles.
I would say that Real Madrid's performance last season was terrible because they were barely able to win any other title apart from the Copa Del Rey. Real Madrid failed in La Liga, they failed in the Spanish Super Cup, they also failed in the Champions League and it was a big blow for a team that was the favorite last season.
Last season Madrid played badly, that is a fact. I think you need to admit it even though some of your explanation about other teams are true. Real Madrid and all the La Liga teams that will play in the Champions League next season will return to zero, even for Manchester City who are the reigning champions.