I would also state that it's a technology and availability issue. In HO scale, I can buy a prototype detailed locomotive that features great detailing, advanced lighting, DCC, and great sound for under $350. To achieve that in O scale 2 rail, I need to spend north of $700 whether it be to purchase a turnkey Sunset 3rd rail model or spend more money to buy an OMI brass model that I need to install the lighting and DCC in. Not to mention that in O scale, it's hard for me to buy what I see on the railroads. If I want to buy a GE ET44AC (Tier 4 GEVO) in HO, I have 2 great options in Intermountain and Scaletrains. I don't even think the model exists in O scale (MTH?)
I also agree with the space issues. More people are interested in prototype operation and that requires space to make than just a loop of track around the wall.
Sean