Yea, there where FAR to few NPCs and the towns didn't seem realistic at all.
They simply NEED more NPCs and again, people will say "many NPCs mean they ill be flat", NO that doesn't have to be. They can really make thousands of NPCs and have each of them have a personality, what they need first is a randomizer that can set a personality by factors.
I think the really big problem in that field is the voice acting and with that the depth of conversations. Oblivions fully voiced dialoges where a nice try but the amount of conversation options was significantly lower than morrowinds. Yea, yea, walking encyclopedias, i know, but at least some of them could tell you a backstory.
Not just that and more options, either. For random factors to better convey personality I think the dialogue system in general needs some restructuring. With Morrowind you had the encyclopedias which had no reaction variety; everyone says the same thing, your reactions to them are all the same thing. Oblivion has only a handful of topics and a few pre-made responses, which robs personality from the NPC *and* the player. What I think would work better is for the player to have their list of keywords - things that can be brought up in conversation - and buttons to set the tone. For example, setting the tone to "?", then selecting "Gray Fox," to mean that you're
asking about the Gray Fox. Or, set the tone to "!" to
tell someone about whatever you've heard about the Gray Fox. An NPC created with really low disposition toward the Thieves Guild might go into an angry rant when you ask, or cut you off with an "I don't want to hear about it" if you try to talk about them. A setup like that would not only allow for more personality from NPC's that comes out in conversation (instead of the Oblivion method of immediately throwing their personality at you, because there isn't really any conversation after), but puts a lot more potential in the player's hands. The ability to TELL things to NPC's is sorely lacking; all you can really do is ask and respond. I want to infiltrate a faction, learn their secrets, and bring the info to someone who will react to it...something I'd planned the moment I first saw a Gray Fox poster, only to sadly discover I had zero choices in the matter.