Wow, what an intelligent thread!
I wonder if I can still write in it :)
When I first read the article I was a bit shocked at the statements you made. That Sephiroth is the most cliche villain? That the dialogue is terrible? That the love-story is of the likes of Twilight?!
I think you over-evaluated Final Fantasy 7 and put it to '00+ standards, when this is a '97 game, when you mention the graphics. For 1997, this was the dog's bollocks (and still is in my opinion - amazing graphics don't make an amazing game for me, but they do help) and its short cinematics are still incredible to this day. Weapon attacking Junon... still gives me the shivers just thinking about it.
Can you watch that and still seriously tell me the graphics remind you of a child's artwork?
However on that subject, I think one of the reasons the game was so hugely successful was because of the block-like designs and simple features of each character. It gave people room to interpret each person's features to our own ideas (although we're given a small picture of them in the menu frame). That way we weren't inhibited by a tear down one person's cheek, or an evil grin unless it was purposefully shown by Square. I also find the lack of sound for the dialogue to support my views on this, as we can interpret the way they say things in whatever manner we see fit.
So for many viewers, reading a few lines on a blank-faced block gave them a unique ability to project things they like onto the characters. Hence why girls always fall over Cloud and guys... uhh... just look up Tifa on Google Images with safe search turned off. You'll know what I mean.
If you really think about it - how many characters have you disliked because there was something wrong with their appearance or voice? The simple styles and colours of their clothing even emphasize this.
Wow, this really is turning into quite an essay.
I have to defend Sephiroth, though. It's my duty as a loyal fan.
My interpretation of Sephiroth begins as a character who is neither Good nor Evil. He is just inherently corrupt as a specimen as opposed to a human being. And a division of Hojo, no less. He is a quiet, indestructible hero serving ShinRa and doing his duty with no real feelings towards anything in either direction. Upon finding his true 'origins' so to speak in the Mako Reactor, he goes into the mansion to discover more about JENOVA, the Ancients and so on and so forth. Sickened by this, he chooses to burn Nibelheim to the ground and heads for the reactor to fetch his 'headless monster' of a mother and attempt to free her from being the eternal slave to ShinRa. He then gets (presumably) killed by Cloud and his mother, and his mothers' head is shipped off to Midgar for safe keeping. This is where the game begins on Disc 1 of FF7.
So Sephiroth died, and his physical form is destroyed - however his 'spirit' is so powerful from the JENOVA infusions and various other things that he has the ability to resist merging with Lifestream.
Already we have a motherless experiment-gone-wrong who's died and come back to life again. If this is "shortage of character [that game designers felt the need to give] him a 20-foot long sword to compensate", then by God... what the heck do you call a complex one?
For full details on Sephiroth's character and WHY he is the most impressive, entertaining and down-right bad ass villain of all time, you should read: http://www.ffshrine.org/ff7/ff7_theory_sephiroth.php
It gives a slightly more thorough outline of what we 'know' from the game. I have a feeling when you played FF7, you missed out a few important plot points that would have definitely persuaded you to think otherwise about our One-Winged Angel.
On a lighter note, I do agree with your points about emotionally manipulating the player with a lot of heavily suggestive and exposing dialogue (not in those ways :P) - as well as how you pointed out the character diamonds. However as other people have stated... this is what all great writers use to avoid cliche and make loveable and unforgettable characters.
I hope this cleared things up and isn't overlooked or ridiculously too late.