There are several reasons why Ruby / Ruby on Rails is not that popular for on-premises software (as opposed to hosted/SaaS software):
I think there's quite a few actually: http://isitrails.com (this site's database apparently has over 4500 Rails sites). For what it's worth, my site is built using Rails, and I'm building my software product using Rails.
I don't think there's much correlation between market size and the development platform. I'd say that Rails deployment is still harder than, say, PHP deployment and not as widely supported by hosting providers. On the other hand, I'm not sure there's anything like Engine Yard or Heroku for PHP.
37signals product are entirely built on Rails and they are like the hottest startup in town - I think it's an amazing language and the closest to agile techniques
i tried installing rails on my .net machine for test development. Gave up after 4 hours. Rails, Django programming on a windows enviorment is tough. Plus when you build commercial products for sale your goal is to be profitable as soon as possible. Its less expensive to hire a php prrogrammer if your aim is to build software packages that run on a clients web server.
For desktop apps, rails does not do that. A great choice that is often neglected for real desktop apps is AIR. I love air because of its use of webkit browser, and use it often for AJAX only apps.