The Story of Infocom (2000) [pdf]
web.mit.edu
web.mit.edu
Though Infocom died, their spirit lived on in a lively and incredibly innovative amateur interactive fiction community.[2][3][4]
For a tiny taste of how far interactive fiction has come since the days of Infocom and the Z-machine, see Inform 7.[5][6][7]
[1] - http://tvtropes.org/pmwiki/pmwiki.php/Main/JumpingTheShark
[2] - http://www.spagmag.org/archives/index.html
[3] - http://brasslantern.org/
[4] - http://www.ifwiki.org/index.php/Main_Page
[5] - http://brasslantern.org/writers/iftheory/tads3andi7.html
With Infocom, I think the issue really was mostly with business fundamentals. The investment in Cornerstone turned out to be a product that didn't work well enough, and wasn't really within their existing business - and subsequently they couldn't keep up as the average cost of games started inflating to incorporate more audiovisual content.
But Z-Machine probably could have stuck around and adapted if Infocom had survived that period and restructured around the trends to make their games more elaborate and movie-like.
The virtual machine approach did have grave consequences for Cornerstone - performance just wasn't as good as the competition. While it allowed a full-featured database product to ship on just one floppy it made performance so sluggish that one test abandoned testing their larger datasets after horrible performance with the smaller data.