Daggerfall, lacked MANY things Skyrim has since had to fill space with. I can't believe you actually tried to compare Daggerfall NPC's with Skyrim. I don't mean to be rude but...that's silly.
Haha, it does seem silly, especially considering how generic they were. But in actuality, there were countless NPC's in the cities of Daggerfall. They may have all said the same things, practically, but wouldn't you expect that from the average townfolk? They would give you directions to the shops or whatever else you were looking for... sometimes even the wrong directions. They served their purpose. They were there for atmosphere. They were "nobodies" as they were in medieval times.
Besides, there is something that may be easily overlooked. In Skyrim, there are also NPC's that serve absolutely NO purpose other than to be extra bodies in town. Not only that, but they have a LOT less to say to you than the random townsmen of Daggerfall. They are just like the guards, only with no combat skills. They will repeat a phrase over and over when you try to talk with them... not even going into dialogue mode. Indeed, they may look and sound better than their Daggerfall counterparts, but they do a much less effective job.
It's not that, but newer games have so much more [censored] to go through to get anything in the game. All these graphics come at a big price, voice acting a huge price also. It's not so much a limit of their ability, but of the technology. You can only do so much, if you want more NPC's be prepared to sacrifice some development time that could have gone to something else. Modern technology costs a hell of a lot to use, unlike the smaller simpler technology of yesteryear. An example of this is Dwarf Fortress, now that has TONS of stuff to do. But look at the cost of developing that much features, the bar minimum one could call graphics and sound. It's largely text based, but there's just so much in the world that it's gigantic. Perhaps one of the biggest games around. I would say game developers are crushed for time, there's just only so much manpower and technology to do this stuff.
That is very true. Today's technology takes a lot to implement. However, that is a poor excuse to make games that actually play worse than they did with inferior technology. I'm not saying that's the case with Skyrim specifically, but in general. After all, Skyrim and Oblivion are running on the same systems. The technology is quite old in relative terms. That means there should be a LOT of improvement on implementation. Why have the cities in Skyrim grown even smaller than those of Oblivion?
Still, what does it say about newer technology when you supposedly can't do half the things you could do with the older technology? I don't know about this "Halo" generation, but give me depth in gameplay instead of graphics... especially in an RPG. New technology should mean games will progress, not regress. In these days of multi-terabyte hard drives, 32+ GB of RAM, and Blu-Ray discs, size should be one of the least concerns for game development. I understand that consoles don't have such a capability yet, but I've honestly played better games when I had 32mb of RAM.
But thank you for the mention of Dwarf Fortress. I'll have to check it out! By the way, is there anything wrong with text-based dialogue?
I think the difference lies in current generation games needing NPCs with hair that blows lovingly in the wind and that scratch themselves when standing around in pants you can tell are linen or leather. Me? I'd rather have the quantity.
Haha, too true, too true! I can do without kill animations if it comes at the cost of a broken combat system

yes ES:VII will rock indubitably
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imagine... graphics out the yinyang, facial feature animation that makes la noire look like dog crap, environments that make skyrim's world look like the map in super mario world, combat as tight as a top tier fighter, a story like the godfather, and being able to start forest fires with fire spells...
If that's truly the case, you should look into the cryo-stasis technology they have nowadays. Because I fear that TES VII will not be released for MANY generations to come

Fable 3 had lively and populated cities with full of life NPCs.
Just a friendly piece of advice... HIDE!
You said... the "F" word! ;-P