Since the film musical genre is clearly not dead, the whole premise of the OP is wrong.
I did however find this interesting commentary from wikipedia, which summarizes neatly our debate here:
Over the last thirty-five years or so, the musical film has declined in popularity, although with the success of the films West Side Story, The Music Man, My Fair Lady, Mary Poppins, and The Sound of Music, there was a resurgence in the 1960s. One reason for the decline in interest in musical films was the change in culture to rock n' roll and the freedom and youth associated with it. Elvis Presley made a few movies that have been equated with the old musicals in terms of form. Most of the musical films of the 50s and 60s, for example Oklahoma! and The Sound of Music, were straightforward adaptations or restagings of successful stage productions. The most successful musical of the 1960s created specifically for film was Mary Poppins, one of Disney's biggest hits.
Despite the success of a few musicals, Hollywood failed to capitalise on these by producing a series of enormous musical flops in the late 1960s and early 1970s which appeared to seriously misjudge public taste. These included Camelot, Hello Dolly!, Sweet Charity, Doctor Dolittle, Star!, Darling Lili, Paint Your Wagon, Song of Norway, On a Clear Day You Can See Forever, Man of La Mancha, Lost Horizon and Mame. Collectively and individually these failures crippled several of the major studios. By the early 1970s it was felt that the film musical had had its day.
[edit] The musical film today
With the traditional musical seen as box-office poison, by the mid-1970s filmmakers avoided the genre in favor of using music by popular rock or pop bands as background music, in the hope of selling a soundtrack album to fans. Even so, there were exceptions to this rule, notably the 1978 film version of Grease, filmed in the traditional style, albeit using a different musical genre. Once again, however, a follow-up (Grease 2) bombed at the box-office, as did a calamitous attempt to resurrect the old-style musical in Can't Stop the Music (a vehicle for The Village People) which was released in 1980. Instead, films about actors, dancers or singers have been made as successful modern-style musical films, with the music as a diegetic part of the storyline. Many animated movies also include traditional musical numbers; some of these movies later became live stage productions, such as Beauty and the Beast and The Lion King.
In the early 2000s, the musical film began to rise in popularity once more, with new works such as Moulin Rouge!, Across the Universe,and Enchanted; film adaptations of stage shows, such as Chicago, The Phantom of the Opera, Rent, Dreamgirls, Sweeney Todd and Mamma Mia!; and even film versions of stage shows that were themselves based on non-musical films, such as The Producers, Hairspray and Reefer Madness. Under the mainstream radar, there have been acclaimed independent musical films, such as Hedwig and the Angry Inch and Dancer in the Dark; and foreign musical films, such as 8 femmes, The Other Side of the Bed and Yes Nurse, No Nurse. In 2004, the New York Musical Theatre Festival presented a week-long festival of modern movie musicals that included 10 independent features made since 1996, as well as several programs of short movie musicals.
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