You know, it seems to me that trying to explain where the audiences have gone is a little like trying to explain the "troubles" in Ireland - it is a very complicated set of circumstances. Quite a bit of what has been said above is on the money, but,...and Lord, I may be cynical here, but - I don't think that music matters that much to most folks anymore.

When I was a kid growing up, shortly after the fall of the Alamo, why, music was the core of our being and our heros were musicians and singers - what a great thing it would be to be able to play like them. You could go and hear "real" stars in various bars around town or coffeehouses, or whatever. Jerry Lee Lewis used to play at a bar on Wyoming Avenue in Detroit back in the sixties and ALL of the Motown acts (as well as various R&B and jazz touring acts)could be heard at a bevy of clubs in and around Detroit on a nightly basis.
My dad used to go hear the real Dukes Of Dixieland at the Crest Lounge over on Grand River in Detroit in the sixties while Gordon Lightfoot and Joni Mitchell used to play the coffeehouses in the area.

The heros of today are not musicians, they're "pop stars" who may or may not (usually the latter) have any musical talent at all, but really look GREAT. The heros of today are not musicians, they're athletes who make millions of dollars per year catching and throwing various balls around. The heros of today are not musicians, they're movie actors who come out with a new film every month and newscasts, magazines and talk shows are brimming with chat and disection on who these people are, who they are dating and who they are cheating with - it's a different world and I personally do not think that live music, at less than a major venue, with all of the bells and whistles and the tag of being an "event," holds much of an interest
any more for most people - at least those under forty.

Hey, I spent two hours one night sitting at a bar talking to a guy by the name of Bill Staines - ever heard of him? Bill Staines! My wife and I had gone out to see him at a Fort Worth pub about a year-and-a-half ago and less than twenty people showed up to hear him - less than twenty people! If Bill Staines can't draw twenty, how can I complain when I draw eight or nine? In fact, I recall seeing the door to the pub fly open in the middle of one of Bill's songs and three people stepped inside with a handful more behind them on the threshold; they scanned the room then one guy mumbled something and they all turned around and let the door slam as they left.

I'd love to keep going here but I'd bore y'all half to death and I do have to go pick up my daughter; but, one final thought here is that there is too much music. Think about it - there is music everywhere you go these days, so much so that it's hard to get away from it - a side product of technology and marketing strats to be sure; but, this is a good thread and the answer is complicated. Cheers.