I was a heavy appjet user. It was indeed an awesome system.
I think there were two reasons it didn't succeed:
1. It's niche was razor-thin. It required some skill to use, but was so minimalistic that many programmers would prefer to take the extra time to set up a "real" server.
2. Too ahead of its time
I suspect tools like appjet will be commonplace in a couple of years. In fact, I wouldn't be surprised if the "Google Wave" thing is a ruse and that these guys are actually working on an online editor for Google App Engine... This could, in theory, turn Chrome OS into an awesome dev environment, no?
I used AppJet myself for small personal projects, and liked it a lot. However, it wasn't complete enough for commercial use, perhaps as a platform for another startup to build their web app on. For example they didn't support development outside their web IDE, multiple code files in a project, a storage system with known scalability properties, or paid accounts with higher resource constraints.
I know they were working on at least two of the four features I mentioned above before they decided to abandon AppJet in favor of EtherPad. Building their own app to prove their platform was a good idea, but I guess they just didn't have enough resources to work on the app and the platform at the same time.
I'm not sure what the AppJet guys would have considered success to be, but if they expected other companies to build commercial apps on top of their stuff I think they gave up too early.
"Does anyone have any theories on why appjet never took off as a product?"
Basically people aren't going to switch to a new way of doing text unless someone forces them. Only a very small minority of people use something like FreeMind or EverNote instead of Word as their primary writing tool, so how could appjet ever hope to get more than a tiny fraction of those people when their best functionality only works when you have multiple people?
The only way to get mass adoption would be to force people to use it, which is possible, but only if you design the company around that from the ground up. Which I don't think they were organized to do, at least as far as I can tell.
If Google wants to, they actually have the ability to force more people to use it. Not sure if that will happen, but I hope it does since I wish I were able to use it more myself.