If we're going to judge TES by medieval standards (i don't think it's a good comparison as they've been at that level of tech for 1000s of years) we have to look at what a city means. It was a population centre and a place of trade, industry, justice, religion, technology, vice and power. Do any of the Oblivion cities match that? Do any of them come close? Other than Skingrad's vineyards i don't really see any industry or reason for these "cities" existing.
A city may not have been as large then as after the industrial revolution but it would be sizeable and have considerabley more infrastructure than OBs (and morrowinds)do. Populations may not have been as concentrated but that doesn't mean there weren't people around. A city would be supported by a series of towns, villages and farms. Outside of OBs walls there's almost no life.
As a representation of a world i thought OB failed entirely at consistency and plausibility. It was a fun enough playground but that was it. I'm hoping that Skyrim does a much better job.
http://www.gamesas.com/index.php?/topic/1155401-building-the-towns-and-world-of-skyrim/page__p__16912489#entry16912489
I agree. Morrowind had a lot more sense in that department. There you had mines, plantations, farms, transport, seafare, religous routes, heck, there were even beasts of burden and livestock! Oblivion's cities were big enough space-wise, but in terms of population and infrastructure they fail miserably.