I don't fully get this.
Perhaps the single most dramatic - in the sense of surprising, and also in the sense of exhibiting characters and the conflict between them, and also in the sense of thematically powerful - moment that has occurred in a game I have GMed was when one of the PCs had been captured by an enemy cult, and was about to be sacrificed by the cultists, and the other principal PC decided to embrace the cultists and go along with the sacrifice, thereby transforming himself from a politically obscure although personally powerful magician into one of the most powerful political players in a reemerging empire to whom the cultists belonged.
A similar sort of event occurred in another campaign when the warrior priest and esoteric monk PCs discovered that their fox-spirit ranger/rogue companion was in fact an escapee from heavenly-imposed exile. They discovered this when the constables of the heavens turned up to try to capture the fox and take him back to heaven to face justice. The clerical PCs chose to help their friend by fighting against the constables of heaven. This was the first of many escalating conflicts with heaven that culminated in the PCs allying with an exiled god to bring a dead god back to life and thereby resolve a cosmic conflict that an ancient pact between the heavens and the hells had attempted but failed to quell.
In my experience, these are the sorts of stories that can be produced by character- and situation-focused play when the players are given the freedom to respond as they want to.
As stories, they have all the flaws that are typical of the roleplaying genre - hackneyed tropes, poor dialogue (where it occurs at all), meandering plot development, numerous irrelevant sidetracks, and inevitable unresolved storylines (sometimes caused by nothing more than poor memories from session to session).
But they do have cohesive backgrounds and settings, heroes, villains, and meaningful conflicts that come to a resolution. And they have two virtues that are special properties, I think, of RPG-generated stories. First, no one in the audience for the story - player or GM - knows how the story will unfold until the game is actually played. Second, the overlap between PC choices and player choices gives these stories a particular emotional/thematic force. Thus, when the PC betrays his (former) comrade and joins in the sacrifice, not only is the PC expressing a view about the priority of power over loyalty, but the player, by choosing to have his PC act in this way, is (like any authoer) expressing the view that it is worthwhile to portray this view in a fiction, but also, by having the view expressed by the protagonist who is his unqiue vehicle in the game, is at least flirting with endorsing it. In my view, the thematic tensions and resolutions to which this can give rise are quite different from that of an actor playing a pre-scripted part. (And not thereby superior, but I think clearly different.)
Neither of these virtues would be possible if the game simply consisted in me, as GM, telling the players who the enemy of the PCs was to be, and then steering the players (whether by overt or illusionist techniques) to a predetermined resolution of that "conflict" - and I put "conflict" in inverted commas deliberately, because when the players don't themselves choose who their PCs' enemies will be, and don't themselves get to choose what sorts of choices are worth making for their PCs, their may be a fictional conflict in the gameworld, but the sort of real world tensions and resolutions that actual player choices can give rise to will (it seems to me) not be achieved.
EDITED TO ADD: There can be many enjoyable things about RPGing besides creating a story. A lot of players, in particular, like to explore an imaginary world, and sandboxing obviously is one good way to do this. My point is that, if you want a story, then giving players the freedom to make real choices that make a difference to the establishment and resolution of conflict in the game (and not only ingame conflict but the actual thematic tensions that play gives rise to in the real world) is a good way to go about it.
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I have a tendency to give my players enough rope to hang themselves with, and I have a reputation as a "Killer DM" for doing so.
