Those don't have to be mutually exclusive though. To take AI out of it, think of those murder mystery parties where actors interact with attendees. Actors have roles to play and things they must do to move the story forward, but they improvise their dialog when talking with the players and sometimes each other. Or if you've ever played D&D, you have experienced talking with NPCs that are controlled by your DM. I think video game AI could be a lot like that, where NPCs use natural language instead of rigid dialog trees, but otherwise, they behave a lot like they do today.