Storytelling in Games
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Let's think about Grand Theft Auto 3 (and the subsequent followups) for a moment. The player starts in a large area that he or she can explore. There, the player can discover story 'hooks' that lead on to additional gameplay, unlock new sandbox areas, or progress to even more story. In the case of GTA, each individual story branch was usually told with cutscenes, but other story techniques can apply.
The advantage here is that you maximize player freedom. Of course, the disadvantage is that any of the crutches of linear narrative are gone, unless you force the player through certain story 'gates' in order to advance. The Grand Theft Auto games juggled this thorny problem amazingly well, with a mix of techniques, and have rightly been copied ever since.
I should point out that this type of storytelling also works in games that we don't traditionally call 'sandbox' games. A lot of well-made RPGs fit into this category, like the much-loved Baldur's Gate and its many predecessors and descendants. Massively multiplayer games also use this same structure.
This model can contain as much story as the designer has time to create. Creation time is important: if your story is told through text bubbles, there's room in a design like this to get pretty deep. (Do yourself a favor and actually read through all of the Duskwood quests in World of Warcraft -- yeah, actually read the text, and the journals, and the writing. The stories are haunting, tragic, often beautiful and sometimes really creepy.) However, if the developer has to handcraft expensive rendered cut-scenes for every piece of story, then it's easier if the story is shallow, since games have a finite budget. Given the choice, a limited budget should rightly be spent on gameplay.
