Why? Limited flexibility, customization and capability in the OS. Limited (very limited) application support. Only 2 phones (Pre and Pixi) that offer it, and the Pre is a year old, which in phone terms is an eternity. Initial quality problems with the Pre hardware turned a lot of people off. Tiny screens. And that speedy performance actually goes south pretty fast when you add some apps and really try to take advantage of its multi-tasking. Search the phrase "too many cards" for more info on that.
And Palm ignored it's heritage. They had a built in market of hundreds of thousands who were sold on the classic PIM apps from PalmOS, but the Pre was introduced with some of the weakest PIM apps on any smartphone, which drove away many of the faithful. The lack of a built-in method to run legacy Palm apps, combined with no initial support from 3rd party developers turned a lot of us off, too.
Combine those limitations with possibly the worst ad campaign in the history of the mobile industry, and you get where you are today.
It was too little, too late, for Palm. iOS owns the trendy, entertainment space, which is what Palm targeted. It doesn't have the apps to really support the business space (or the entertainment space, for that matter), and taking on BB, with historical support from business and lots of devices on multiple carriers, and Android, with many more devices on multiple carriers, and many more apps to boot, is a tough nut to crack.
Palm owned the smartphone space about 6 years ago, with only the staid, no touch-screen BB to compete with. Instead of using the revenue from the old Palm OS PIMs and the Treo line to start building something like WebOS then, they squandered it on wasted efforts and false starts. In the meantime, Apple revolutionized the market with a device that really wasn't all the special, but looked cool, had a great touch screen, and a great ad campaign. Microsoft spent millions to buy market share, and then squander it, and Google bought Android and spent millions to buy market share.
WebOS will be a historical footnote. HP doesn't seem interested in phones, so I suspect WebOS will become a tablet OS. It will probably be a very good tablet OS, but I think it will once again be too little, too late. In spite of Apple's success, consumers tend to be suspicious of platforms that don't get lots of support from multiple vendors, and developers tend not to write apps for platforms that don't get lots of support. Without app support, who's going to buy a WebOS tablet instead of a Windows tablet or iOS tablet?
Yes, I'm one of those bitter ex-PalmOS owners. There's still nothing else on the market that handles calendar and tasks better than PalmOS. I waited for more than a year for Palm to turn WebOS into something I could use, but finally gave up and switched to Android.