It's a cultural thing. Back in the day, pop music came from musical theater, and musical theater really wasn't much more than a revue with half dressed girls running around the stage. Also, they didn't have television, and movies were much more stagey (so seeing a movie was like seeing a play). It all kind of happened at once (or over a period of twenty years :P). All of the sudden everybody had a television, movies were becoming more "high tech" and naturalistic, rock music became the new thing with kids and their kids in turn would grow up on different kinds of rock music, and musicals became artsy and started reaching farther (so your brain had to be engaged).
The effect the television has had on the world is enormous, but one of the side effects is that it essentially placed theater in a pocket as a minor entertainment. Also, the theater got more high tech. Prices go up. The theater audience gets older, and even the theater scene changes as it tries to adapt to the new popular culture. There's a funny story about a guy who stepped into West Side Story, probably some tired businessman on his way home from work, who left during the first five minutes when he realized what he was in for. Well, that's what happened. Suddenly the theater wasn't what it used to be, suddenly it either took itself rather seriously or was playing a different kind of music, and unfortunately the only mass audience was one from an older time (which to me explains the immense popularity of shows like Fiddler and Hello, Dolly). Plus, you have to drive to theater. Why drive to the theater when you can sit inside your house and watch your old friend Jennifer Aniston get into some wacky situations? Note that movie theaters are losing a lot of money lately because nobody really goes to the movies anymore.
So people came to regard musical theater as an expensive cultural thing. Maybe you go to NY and you see a Broadway show to say you've seen a Broadway show. To us, Mamma Mia isn't exactly the most intelligent thing we've ever seen, but to the average Joe, hey, that's Broadway, it's high culture. Occasionally a show comes along that for some reason strikes just the right chord with youth culture (HAIR, RENT, Wicked, etc.) or adults (The Producers). But even rock music has evolved through the years. Nostalgia and trends aside, kids don't listen to Elvis en masse. Like anything, Musicals had their day. It's possible that some day they will become a major part of popular culture again, albeit in a dramatically altered form. You know, how the musical is an off shoot of operetta which is from opera... etc. Hopefully the next stage of evolution is NOT the jukebox musical!!
PS: A stage show can never have even a significant percentage of the audience possible for a television show or a movie. Thus why an art flick can still have a bigger audience than a musical (although not nearly as devoted or affected, I would wager). My Fair Lady gave Julie Andrews clout with producers and a small percentage of the population, but Cinderella and Mary Poppins made her a household name. Although My Fair Lady is an anomaly for its time as it was one of the best selling records of the year. Which is weird.
PPS: If a person says they don't understand how people can just randomly break out into song, it's because they are either stupid or unimaginative. I'm not being mean. If you can suspend your disbelief for a music video, you can suspend your disbelief for a musical. It's not exactly a surprise that people on stage are singing. You know that people are going to sing on the stage, they are on a stage, and there is usually a lead up to the song, such as an orchestra lightly playing an introduction underneath. It's just a dumb thing to say.
Again, yet another case of television destroying our imaginations. Television ruined movies, it ruined books, it ruined the theater, it ruins everything~_~
yr ronin,
joey