Nobody ever said VHS quality is all you'll ever need.
The difference between DVD and VHS was monstrous. DVDs didn't degrade like VHS did. They didn't have dust and flicker like VHS did. Most importantly - DVDs allowed you to pause without damage, skip anywhere in the film almost instantly, and ended the pain of rewinding. It gave surround sound and it gave bonus features.
The convenience alone sold the format. Better quality was just a boon.
BluRay offers none of that. Yes, you can argue the higher quality, but it's not apparent on anything less than a 40" TV (insert Dagok Sony rant here.) It makes no sense to buy it for your spare TVs. In which case it makes no sense to buy BluRay discs (although many manufacturers caught on to this and put a DVD version on the back side.) Why buy a disc you can only watch in one place?
That said, if you have a 52" TV it makes plenty of sense. But that's not enough of a reason for it to really catch on. EVERYONE wanted DVD players to get a better picture EVERYWHERE, get the special features on DVDs, and get the easy access the format allowed vs very limited VHS.
BluRay just looks better. At a price. It's a much harder sell. I remember when I bought my first DVD player - my parents couldn't get enough. They're not big gadget people but they'd heard of DVDs and needed a player immediately (even if it involved buying a new surround sound system they never figured out how to operate.)
They have no clue what BluRay is. They likely never will. I bought them a new TV and an upscaling DVD player. This way, when they walk into the video store, they don't rent a disc that they can't play. Considering Blockbuster is almost exclusively DVD, it's just what they'll pick up. No hassle. No worries. Nothing new to learn.