SF Signal, which has become the web's most essential SF/F blog, has a fascinating discussion up titled "Is the Short Fiction Market in Trouble?" Personally, I agree with Charles Coleman Finlay's comment that "This is the Golden Age of the short story in science fiction." As he states, yes, few people can make money merely by writing short fiction these days. But the only reason there's a debate on whether SF short fiction is dying is "because people are fixated on the old paradigm." Amen to that. I love short fiction. I read tons of short fiction, both in print and online, and I know there are many others out there just like me.
Just because people aren't buying short fiction magazines the way they did 30 years ago doesn't mean there's no interest in short fiction. After all, people don't buy record albums or CDs the way they did even a decade ago, but that doesn't mean people aren't listening to music. Instead, people are finding new ways to listen to music such as through iPods, iTunes, and other digital delivery systems. The same goes for short fiction. As I finish compiling the notable story selections for this year's Million Writers Award for best online short story, I'm constantly amazed at how many top-notch online magazines there are. While the professional SF magazines may have had larger circulations a few decades ago, there were no where near as many people writing, editing, and promoting short fiction as there are these days.
As Finlay states, the paradigm is changing and that scares some people and excites others. Speaking for myself, I prefer to embrace the excitement instead of the fear.