I think the real reason MFS royally bombed is because Muppets are underground, and its been that way since the 90's. Muppet fans seem more underground and niche than even say Firefly or Henson's own Farscape brand in some respects(certainly in an online presence)
Another big reason is because of the time: The Muppets 'retro/nostalgia=cool' phase did not kick into full force til 2002(re: Weezer's Muppet video), so this was squarely aimed at children. Well, a lot of kids aren't too familiar with the Muppets, and many might just assume it to be Sesame Street.
And finally, as Jamie said...it was in many ways too far removed from its roots.
I personally find the first 20 minutes of MFS visionary. The whole opening number in the boarding house is pure Muppet magic. I also love how this is the first time we see Pepe shine and come into his own as one of the main characters. I felt after Gonzo got kidnapped it went significantly downhill; but *since* its release on dvd Ive grown a new appreciation for it.
I would now have to say my top favorite Muppet movies/specials in order would be
fave to least fave)
Muppet Family Christmas
Muppets Take Manhattan
Muppet Movie
Muppets @ Walt Disney World
Muppets Remember Jim Henson
Muppets From Space
MuppetVision 3D
A Very Mery Muppet Christmas
Great Muppet Caper
Letters To Santa
Emmet Otter's Jugband
Muppets Treasure Island
Muppet Christmas Carol
Kermit's Swamp Years