Put me down as DM who doesn't really get the distinction being made. Roughly half of our 4e homebrew setting document is a list of NPC's. They're as much a part of the environment as a dangerous alley, a storied mountain, or the setting's peculiar afterlife is.
Let me give you an example from our setting.
- Ingenué Santos is an explorer and airship captain. (NPC)
- Her airship is carried beneath a lighter-than-air Astral Starfish, which is buoyant because it's full of the void and infinitely-remote stars. They can also be persuaded to shoot bolts of purest void. (setting fluff)
- It's well known that Ingenué is planning an expedition to the mythical land called the Interior. (future plot hook)
In writing up Ingenué I was creating the setting, because good settings are made of
people, creating a potential campaign arc, and indulging in pure worldbuilding porn, in the details about the Astral Starfish.
This example could easily fall into either worldbuilding or setting design, and likely falls a little into both. We as readers have no way to determine the difference at this point. Was this character needed by the world, a logical consequence of the world, something that you wanted to have in the world? Or was it something that was created because the PCs needed this for their story? Was it necessary for the plot? If this character was yet to be introduced, and the PCs or plot needed something slightly different, would you be happy to change it, or would you just say that this is how the world works, the PCs need to figure out how to deal with it? We don't have near enough info to tell the difference. From the player side, good DMing makes it impossible to tell the difference between setting creation and worldbuilding, and in this case, we as readers are stuck in just about the same place.
The idea being, was the character created to directly address the the goals of play, the themes of play, the PCs character or personality, or the plot? If so, it might be setting design. Was the character created because it is the type of character that might exist in the world, or it would be cool and you want to add it, because this would make the world believable or interesting? If these are your motivations, it might be worldbuilding.
I guess I should stipulate that these definitions are based upon intention. If it is intended to create a world independent of the PCs, that is worldbuilding. If it is intended to address the PCs, it is setting creation. What the element actually happens to be has nothing to do with it. Worldbuilders and setting designers create the same elements in their games. The difference is why they do it, how they do it, and sometimes when they do it, not what they create.
If you want a story, it makes sense to create elements in your game with those intentions in mind. Creating stuff not addressing the story is extra. For people who want this type of story driven game, worldbuilding can actually be counterproductive, because it can distract form the goals of storytelling. If the world is the point, then creating elements that address the world enhances your game. It might even make your game worse if you address the players and not the world. Setting creation is essential for creating a story. Worldbuilding is essential for creating immersive worlds that exist independent of the PCs. You can do both, but the more of one or the other play styles that you desire, the more disruptive tools suited for the other style becomes. We often do both, but understanding what we are doing can enhance our games, no matter what style we are trying to create.
It would be nice if there were more beginning campaign creation advice that was directed toward storytelling instead of worldbuilding. As it stands, there is very little storytelling advice in the various DMGs.
EDIT: Fallen Sereph, your creation process seems pretty close to mine. There is no defined space and time for any element in my campaign until it is introduced into my campaign. Anything that I come up with prior to play is just a sugestion for how I will use it in play, and I modify a lot based on the needs of the story. I like the terminology of Drag-and-Drop. It also seems to imply the reskinning and almost wholesale idea theft that I use a lot. This is a good addition. Thanks.