Ken, you always go right to the heart of a political question

I think your analysis of the audience aspect is part of it. Commercial theater by its nature is aiming at a general audience. I like to think of Balanchine as a kind of (benign) balletic Tito. He kept all those warring factions together under one Big Tent. The 12-tone people, the abstract expressionist painter fans coexisted happily with people who wanted "Swan Lake" without all that silly mime. Both could sit, side by side, watching a program of "Agon" and "Scotch Symphony," say -- and, for good measure, he'd throw on "Stars and Stripes," for Aunt Edna and little Billy who were visiting that weekend and either didn't know anything about ballet, or hated it.
The other model is Diaghilev's -- cater to a few rich patrons who'll fund you -- and I'm not sure that's better. I don't think many of those rich patrons, despite their education, were any more sensitive to art than Aunt Edna. Diaghilev had to appease them by constant novelty, something we're still paying for today.
I don't know that Europe is doing multimedia extravaganzas, but ballet there is very middlebrow, I think. Either story ballets or quasi-modern dance that really isn't new, but is marketed and bought as such. And endless productions of "updated" 19th century ballets.
I think the commercial theater problem is self-fulfilling. We need an audience! Quick! What do they like? Westerns? Okay, we can do that. The Lion King? Great idea. etc. This drives out the people who would be drawn to a more serious repertory. Now, define serious. Some of the "downtown dance" that Baryshnikov programmed for ABT was, IMHO, schlock. There was no content to it and nothing to recommend it except that it was something the company hadn't done before. He divided ABT into two companies: the 12 people he used over and over and over in the modern dance pieces and the Weekend Rep group. There were dancers who spent 10 years in that company as spear carriers -- I never could find them in a solo. The new pieces didn't develop dancers (and neither did the spear carrying).
One model I think worked, and would be possible to revive (not that it will be) is the old French division between the Opera and the boulevard theaters. Each place was a separate world, catering to a different audience. Often, the boulevard theaters would put on a knock-off of a hit at the Opera -- often mocking it. There was a definite class warfare (not something I'd want revived) and the boulevard people made as much fun of those hoighty-toighty (sp?) folk at the Opera as the Opera goers made of them. The boulevard shows were laden with special effects, and the productions were simplified -- little mime, lots of pretty girls, stories with the subtexts stripped out of them. Kinda like we get on a regular basis today! I'd like to have the choice to go to both the high brow and the middle brow, for lack of better terms.
Back to the younger Mr. B, I think a European's lament that ballet has become commercial theater may well refer to the fact that there is no time given to develop an audience, no time allowed for a ballet to find its public. Having to put on six casts to keep people coming back, or shuffle in 8 new pieces regardless of the quality so that subscribers don't get the same program two years in a row.