I agree, the public perception of what the music "is" seems to be what changed. Which of course is part of the problem, trying to pigeon-hole things into easily definable categories. Improvised music should be a fluid thing...which would of course morph and change over the years as times change and new players and ideas are introduced. However, there seems to have been a disconnect somewhere, instead of moving forward and incorporating new sounds they started looking back. Was this really the musicians that caused this, or a reaction to what the public "expected" jazz to be?
I don't think improvised music is dead, but narrow-minded thinking along the lines of what "should" be defined as jazz surely is.