An interesting and reflective thread, and thank you George for starting it.
It's an issue that seems to have been addressed both directly and tangentially many times over the years on this forum, and each time I think the answer has been the same - that the days of the folk club as we know it are probably numbered, but that the music will survive.

My own take on it is that, for many of us, life is such that the ability to give up one night a week (or even one night a month) is a now a luxury.
Look around at other hobbies and you'll see the same things and hear the same complaints; there has been a 'drawing in' to the point where only the die-hards and the veterans continue to come to the room above the pub/the village hall/the local library to discuss photography/share their stamp collections/build model railways/sample home-brews/display model soldiers/whatever.
The 'hobby' as we know it is going the way of grey flannel trousers and the cardigan, and folk clubs constitute such a hobby.

I mentioned the pressure of life in general, but there are other causes. One is an increasing insularity and lack of cross-generational mixing in society today, and another is the rise of this medium - the internet.
And, of course, there also seems to have been a national collapse in self-confidence. It's mirrored in our culinary skills - people will happily sit and watch television programmes about cooking but they can't/won't cook themselves. We have shifted from an active to a passive role and would rather have entertainment beamed at us than make our own.

All of which sounds pretty negative, I know, but I do think festivals are a beacon of hope in an otherwise depressing landscape. However, I believe there will need to be more crossover between genres if folk is to survive with any strength as a participatory art. It's something that is already happening at the younger end of the spectrum and which is making its way into the mainstream - look at Bellowhead with their kletzmer and salsa-inspired rhythms adding spice and colour to very traditional material.
I know the purists probably wring their hands at such desecration, but to me it's a healthy sign. The music is still respected but it is played without kid gloves and allowed to live.

Even festivals have their problems, though.

Sadly, however, I often see a musical 'apartheid' in action at sessions. The strictly traditional stuff is played well and with gusto by the greybeards in the back rooms of pubs, while the youngsters play among themselves around the food stalls and the beer tents. Too many have experienced the sort of patronising attitude that Oggie describes and have voted with their feet.
And, for many kids festivals are expensive and therefore exclusive. Many are there only because their parents are into the same sort of music and are willing to pay for a ticket, so it's unlikely that 'outside' blood or working-class youngsters will be drawn into the tradition.

So what's the answer?

I'm b*ggered if I know. It would be great if a campaign like CAMRA could be mounted with the same success for traditional music, or of a cult figure could do for folk what someone like Hugh Fearnley-Whittingstal has done for food.

One can dream...