Well, I wasn’t being completely fair to Hello, Dolly! – it was Hello, Dolly! … among a series of other things. The biggest problem being The Sound of Music and to a lesser extent, Mary Poppins.
I’ll try to keep this concise.
Movies were not promoted in the early 1960′s the way they are today. Back then they had this thing called a Roadshow, which took the film on the road before wide release and made the movies a prestige event akin to a Broadway show. Obviously, not ALL movies got this treatment, and this treatment was hugely expensive. At a point in time it wasn’t a huge gamble, because the studios owned all of the theaters, but in the 1950′s anti-trust laws changed all that, so by the early 1960′s, it was officially an investment.
See, the big 1950′s style Rodgers and Hammerstein style musicals were also on the way out – it was a weird time for film and culture in general. You had films like Bonnie and Clyde, The Graduate and In The Heat of the Night revolutionizing what audiences wanted to see, and that *type* of musical was a symbol of the old guard.
Then came The Sound of Music and Mary Poppins, a movie which *did* get the roadshow treatment, despite Disney being at the time one of the smaller studios (and smallEST distributors) not owning any theaters and never having done a roadshow before. Both of these films were massive successes, so massive that suddenly it looked like that wisdom that the old guard musical was on its way out didn’t seem so wise, and the musical got revived in a big way and flooded the market.
Thing is, The Sound of Music and Mary Poppins were probably the exceptions and not the rule, in no small part due to the huge popularity of their stars (Julie Andrews, Dick Van Dyke, and Christopher Plummer) – the popularity of that style of musical WAS on its way out, and the roadshow was destined more to bankrupt studios than promote movies (which is why roadshows are now firmly a thing of the past).
The result was the second half of the decade seeing a serious of financial disasters that were years in the making and hugely expensive, including but not limited to Hello, Dolly!, Doctor Doolittle, and Camelot. Hello, Dolly! gets perhaps more than its fair share of credit for the demise of the big Hollywood musical because it came towards the end of that Sound of Music-fueled trend, but it had its share of problems as well. Streisand, like Andrews before her, was hugely popular and bankable, but she was wildly miscast as Dolly Levi (she was only 25 at the time playing a post-menopausal widow), and her chemistry with a curmudgeonly old Walter Matthau was awkwardly nonexistent. But Hello, Dolly! gets the blame because it was the last gasp, and that was the end of that.
That’s me trying to keep it concise.