Is paper Dungeons and Dragons "bad" because it doesn't spell out every single back story for your character and foes?
Edit: Wait, you haven't even played it? I can understand not having a taste for such a free form game where you make your own story, but to say such things without having played much of the game makes no logical sense. It's no one's job to "defend" a game to someone who hasn't played it. Indeed, you don't need to defend a personal opinion. It's when an opinion is presented as a universal fact where things become broken, and you can't even have a good opinion in the first place if you haven't even played it. I dislike sports games. Should I go around posting in articles about sports games saying how boring I think they are? No! I just don't like the genre, that's all, and many others love those games. On the same token, not everyone is going to love a free form RPG like this. I'd not want them killing world size just to cater to people who weren't interested in the sub-genre to begin with!
It's not hardware that constrains game design anymore, but budget. Game design is already a gamble when it comes to a game making a profit. It would actually be a tragic thing, in my opinion, if super mammoth game budgets became the norm, and most of the smaller game development ceased as only a small handful of companies could cater to the sky high needs of the modern gamer. This has already happened with some genres, like with Square Enix's excuse that they can't make a FFVII-like game with today's hardware. They could, but they'd have to stop trying to make every game a tech demo. Final Fantasy X struck a good balance in my opinion, but even then in a game series like the Elder Scrolls it's the places on the map and past lore that get developed more than each individual character.
I vaguely remember some developer working on FFXIII claiming Libra would give you backstory for each individual human foe ever encountered in the game. That was completely unrealistic, probably even trumping Peter Molyneux's past claims, because there just isn't the time or budget to do something like that.
Perhaps I'll be proven wrong and there will be games with the characterization of Mass Effect or Final Fantasy in combination with a vast world to explore like with the Elder Scrolls games. For now, however, I think you have to choose one or the other. Both just isn't realistic on a budget.
I know I'll definitely be remembering Delphine too, even if she's a rarity among the cast. Perhaps for the main quest more characters could have been used, or the other quest lines. Consider that the more they do that the more characters they need to make "essential," unkillable, to not make writing unrealistically complicated to take into account different characters dying.
If they did this, perhaps they could have say used characters like Onmund, J'zargo, and that one Dunmer woman (heh that kind of proves your point, though I remember two of three) in the College of Winterhold. They are characters in the first quest, but have zero part or development in the rest of that quest line. That's some missed potential, perhaps, since all three have interesting backgrounds, in my opinion. They each have a sidequest the further defines them, but there's potential for more with characters like that. You can't have it all though. Personally I wouldn't want them scaling down the world more just to try and capture a the essence of a character driven game. That's not what TES is about, in my opinion.