With S I think its size works against it, even though it shouldn't. S gives you the benefits of a larger scale but is still small enough you don't have the challenges of O scale (2 rail or three rail scale) with space, it seems like a happy median between HO and O.
I suspect the problem is it doesn't have enough benefits over HO to make it desirable for most people to move up or to get into it initially, you would be giving up a market with tons of offerings, into one where you have limited availability. And you are in a chicken and egg situation, for those moving from HO or from O, the problem may be that there isn't enough offering there to make a scale modeler want to move, and with O 2 rail scale the size difference might be the only advantage to moving to S.
I think honestly that for S to grow it would need something like a Mike Wolf jumping into Lionel territory to jumpstart it, the makers in it now are basically fulfilling the needs of those already there, no one I would hazard a guess is thinking expansion. Part of the problem is the perception, false or not, that S is a nostalgia market catering to AF enthusiasts, which could deter scale modelers in other scales from moving into it, if they see it, too, as 'toy trains'. Again it would take someone pretty bold to jump in there and try and grow S, break the perceptions, and sell it to scale modelers who might move to it if they felt it was 'serious' (and again, folks, I am not knocking S, I am talking about perceptions here that I think are at work). Obviously S is as 'serious' as any aspect of this hobby, but the point is if you are going to go after HO scale or even O scale modelers, there has to be a reason for it; in that I agree with the poster who said AF nostalgia works against scale modelers moving into it
