I agree, this is the best possible solution which gives a good amount of npcs and still have people talk. :thumbsup:
That's a very good thing, I agree. But the less essential NPCs should have more to say than just 'rumors' and '[insert the settlement's name here]. In Morrowind, people new to the setting could gain a handful of basic knowledge about the place, the lore, cultures and its people (in addition, a few local wisdom) just from talking to the townsfolk even though the NPCs sometimes got a bit uncharacteristically too friendly in places (heck, why does this foul mouthed Camonna Tong thug suddenly being nice to my Argonian? Random.) Queries about races and general views from/towards them in the province, the economy, local wisdom, politics, important figures, etc. from the locals would really add much to the 'living the gameworld' experience. Though I'm of the opinion that not simply everyone should be very talkative with you. I think that mostly those that had high enough disposition with you should be the very talkative ones, (and you should be capable of befriending just about any folk, of course). Ultimately it would get quite repetitive somewhat if they had the large amount of topics but handled it the Morrowind's way (and quite a serious hindrance, to boot). A good mix between Morrowind's number of topics and Oblivion's dialog trees are the way to go.
And to be fair, I think maybe part of the reasoning why on Oblivion there's not much to introduce to your character from the townsfolk is because your not playing a "stranger" type of character, but most likely as a citizen of Cyrodiil (or not a total newbie to the province if you will), unlike the case of Morrowind where one of the touted main selling point of the game was to 'explore this strange, alien land and all the yadda yadda'.
tl;dr: most NPCs should have more than a few things to say, but not everything at once being shoved at you. And when I talk to
any of the commoners of Riften I'd expect them to be more than willing to share a lot of things/boasting about their fisheries, the smoking process, the kind of fishes they uses, how do they taste like, who's running the industry, why theirs are the best, etc. And I really need a good sleep.