I haven't played now for at least a month - but when I was playing, I never found this to be the case. Having more cities was /always/ better than having less, in so many ways - primarily by expanding one's sphere of influence into resource-heavy areas, places to teleport to, building armies and engaging in foreign (mis)adventures...
Let me begin by saying that there is nothing inherently wrong with city spam, and the current attempts to fix city spam feel a bit forced. The real question is not why is city spam so bad, it is why is city spam so awesome. There are several reasons in 1.09 why city spam is so awesome.
1) Every city can build one unit no matter the size.
2) Every city can build all level 1 improvements which provide straight resources ( +x, not x%).
3) Every city can expand influence.
4) Every city can build x caravans (where x is the current number allowed by tech).
5) Every city can claim resources.
6) Every city has a shop where the sov/champions can buy items.
7) Every city provides a defensive bonus to troops.
All of these things make city spam pretty awesome. Yet honestly, these are things are not inherently OP nor are masses of cities somehow inherently unfun. The real problem lies in a very simple truth, which is that the time and effort spent to make a city higher level is not rewarded by anything equally powerful as simply building another level 1 city. Lets look at our above list and compare each between a level 1 city and a level 5 city.
1) A level 1 and a level 5 city can both only produce 1 unit at current. The difference is that a level 5 city can build at least 2 improvements which give troop production bonuses. Yet, a level 5 city is not required for these two buildings, and depending on the faction, both can be built by level 3.
2) Both level 1 and level 5 cities can build all the level 1 resource improvements. The difference is that a level 5 city can also build mutliplier improvements. Yet, again, the 1 per city multiplier improvements can almost all be built by the time a city reaches level 4.
3) A level 5 city gives a lot more influence than a level 1 city. However, we find the difference is that most level 5 cities are surrounded by other cities and their large influence ring is mostly overlapping with those of other cities.
4) A level 1 and level 5 city can have the same amount of caravans. There is no difference here, and the applied bonus does not even take into account the relative sizes of the cities. A level 2 city with 2 food resources gets the same bonus as a level 5 city with 2 food resources.
5) A level 1 city and a level 5 city can both claim resources. The main difference is that a level 5 city has access to multiplier improvements and various level bonus. Yet, since there are only 3 types of worthwhile level bonus and the gildar bonus is far more useful for the vast majority of cities, we find that the level bonuses are fairly lackluster. Also, we find ourselves again realizing that the multiplier improvements do not require a level 5 city.
6) A level 1 and a level 5 city provide the influence ring needed for purchasing from the ethereal shop. It doesn't matter that a hero is at some level 1 city which was just captured 1000 tiles from the rest of his faction, he can get all the best magical gear in the realm.
7) A level 1 city with no improvements and no defenses gives +5 hp to all units stationed in it. Here, the difference is fairly huge as a level 5 city gives a fairly impressive defensive bonus. Yet, the difference is simply time. It just takes a long time to even reach level 5 for a city and one would probably never want them to be on the front lines.
