Where did you find the statement that all npc actions have to be scripted? Not being sarcastic, I'm curious.
The bookseller was apparently set up for the demo; not necessarily scripted, but they set up a special situation run-through for the demo to show off the AI. Things changed from the demo to the game. Anyone notice that Todd's character had 10,000 health and magicka? Show off the combat, the outdoors, the creatures, the magic, the npcs, everything in the game, in 20 minutes. Think they maybe set the ai to extremely short timing cycles to get as much/as many actions in as possible?
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The video is the same thing we showed at E3. It's pieces & sections of existing game content and a lot of stuff made specifically for the E3 demo (for example, the entire sequence inside the bookstore -- including all of the dialogue -- was made for E3 in order to demonstrate some of the things you can do with RAI.) The player character was beefed up, and the enemies seriously nerfed (to the point of one or two hits to kill) for the demo.
The forests and terrain (including the beloved soil erosion) are pre-generated in the editor and are then the same for everyone every time you play the game.
Lots of stuff has been heavily tweaked (and in some cases completely redone) since the video was made, and we continue to optimize and improve. We have a lot of people playtesting the game now (internally) and have been adjusting gameplay based on their feedback.
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As far as the bookseller sequence. No, the entire thing was not scripted -- not in the sense that it represents a designer typing in hundreds of lines of script code. In the sense that it's a sequence of events that happen in a particular order, you might consider it scripted, but the way you set up those events, and how the actors accomplish them, is not scripted.
For example, the target practice. All she's told to start practicing (basically) is "fire a certain number of arrows at this target from this location." That's it. There's a bow in the room, so she automatically goes to get it first. There's also a quiver in the room, so she goes to get that. She then equips the items, walks over to the firing point, and shoots a few arrows. The arrows miss the target not because she has been scripted to shoot at points away from the target, but because her marksman skill is low.
That's the difference. She's given a basic goal, and figures out how to accomplish it based on what she has available to her and her stats.
The sequence is a set of examples of the kinds of things you can do with RAI -- including grouping a sequence of AI packages together to produce a tight, deterministic sequence of events.
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On the "demo dog"
The dog wasn't scripted. In fact there were several times that when the demo was run that the dog decided to just stand around for a few seconds instead of heading for the food. Eventually the temptation of the meat was too much for it and it ate.
Actually the demo looks scripted, but after watching it a number of times, you start to see differences that occur each time. But Todd probably practiced giving the demo a hundred times before E3 so it would go off smoothly. Even little things like tossing pumpkins on a trip wire to trigger a trap required skill. I saw several people play through the demo and mess that section up and had to use an arrow from the bow to to trigger the trap instead.
Why the AI may have been toned down:
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Questions about Radiant AI: Okay, here's the thing with Radiant AI... If you ask, "Can the NPCs do this? Or can they do that?" They answer is yes, with RAI, they can do a ton of stuff. But the player is unlikely to see some of it for a variety of reasons. For example, if the player hits an NPC with a spell and they get poisoned, would the NPC try to purchase a cure posion potion? Well, no, not likely, because he's going to be too busy trying to kill the player, and besides, the poison probably won't last that long.
And, in some cases, we the developers have had to consciously tone down the types of behavior they carry out. Again, why? Because sometimes, the AI is so goddamned smart and determined it screws up our quests! Seriously, sometimes it's gotten so weird it's like dealing with a holodeck that's gone sentient. Imagine playing the Sims, and your Sims have a penchant for murder and theft. So a lot of the time this stuff is funny, and amazing, and emergent, and it's awesome when it happens. Other times, it's so unexpected, it breaks stuff. Designers need a certain amount of control over the scenarios they create, and things can go haywire when NPCs have a mind of their own.
Funny example: In one Dark Brotherhood quest, you can meet up with this shady merchant who sells skooma. During testing, the NPC would be dead when the player got to him. Why? NPCs from the local skooma den were trying to get their fix, didn't have any skooma, and were killing the merchant to get it!
