Short answer: most have never seen Blu-ray properly set up and had a chance to compare, and many who have don't think the higher cost is worth the price.
That said, a high proportion of people just don't see much benefit to Blu-ray even on HDMI connected 1080p HDTVs. Toshiba did a study several years back showing people two identical and properly adjusted 40" 1080p HDTVs ... one fed with a Blu-ray and the second a (upscaled) DVD version of the same move. As I recall about 25% of people so NO difference, and of the ~75% who saw a better image from the Blu-ray almost half didn't think the difference was significant enough to make the higher cost of Blu-ray attractive. Now, price differential has decreased somewhat, but the bottom line is unlikely to have changed that much.
Blu-ray is better than DVD -- on a big enough, properly adjusted HDTV watched from close enough -- but consider:
- HDTV ownership is still less than complete (only 57% in the US in December 2010) ... in other words only about half of consumers have the capacity to even see a benefit from Blu-ray
- Most HDTV owners still don't have HD programming so don't really understand what HD can look like
- Most consumers don't have the equipment to benefit from HD Blu-ray audio (in fact most can't even listen to 5.1 DD surround)
- most consumers sit too far from their HDTVs to see the difference between 1080p and 720p (and in many cases even 480p)
- Many consumers have less than perfect vision
- a 37" or larger 1080p HDTV (watched from close enough) is considered necessary to fully benefit from Blu-ray.
- (Well) Upscaled DVD is not much inferior to downscaled 720p Blu-ray
- Resolution is only the 4th most important determinant of image quality (after contrast, color accuracy and saturation) ... all of which are often poorly adjusted by consumers (The majority of consumers never calibrate their displays ... or even adjust the factory setting)
- many Blu-ray disks (while being the most faithful format to the original movie) have grain or colour caste or are poorly remastered and are NOT the razor sharp video that Blu-ray is capable of).
- Many consumers don't care if a comedy or drama is a bit less sharp on DVD ... they are into the story ... and can't A/B compare to Blu-ray anyway.
You are probably right that a fair proportion of consumers are watching DVD or Blu-ray on SDTVs, poorly adjusted, small HDTVs (not even considering the ~50% of consumers without an HDTV), watching from too far away and without their glasses ... but so what? The bottom line is that Blu-ray is a premium priced format for those who have the equipment, knowledge and financial wherewithall to enjoy it. The majority of consumers will never buy Blu-ray (just as they will never buy a Mercedes or a 6 burner Thermador gas range or Macintosh Receiver) unless DVD disappears (and even then they'll be satisfied with VOD).