Why and how was MSX-AUDIO failed?

MSX-Music and FM-PAC? It's the same thing.
By the way, can't say I agree. Depends on how you use the chip.
MSX-Audio has always been a bit too 'crude' for my ears.
Regarding your question - probably not as promoted/endorsed by Matsushita/Panasonic.

FM-PAC Inferior?

I'd say they're different, but you can't put 'm on the same scale when measuring differences. It's true that the MSX-Audio has fully custom voices per channel, a PCM channel and some more differences. The FM-PAC however has an extra waveform per operator, and that does make a difference (slightly different sound, slightly warmer). The FM-PAC especially shines when used in combination with the PSG, as Micro Cabin has proven more than once. I mean, whatever negative sides the FM-PAC has, it didn't stop them from making these:

http://www.youtube.com/watch?v=E1XbUwamuHU
http://www.youtube.com/watch?v=ETJUr4UTqPg
http://www.youtube.com/watch?v=C1Nw7xpPtjI

And then there's also this: http://www.youtube.com/watch?v=N3bjnoOLtrg

It was mainly because of the price of the chip that it wasnt chosen as standard. Besides, ram was expensive too back then, so having sample ram would have increased it even more.

Maybe the music module would have shone more in combination with psg? although we will probably never know unless someone creates a sick advanced tracker

On msx audio vs msx music who is inferior, well for me personally I hated the crappy cheapsounding FM-pac drums when i was a kid, but I guess ive grown used to them i think Same as the relatively small "palet" of instruments.

My Music Module has a low volume compared to PSG, when I use my monitor output.. So I would have to connect both the MSX and the Music Module to a mixer.. The FM-PAC has a normal balance compared to the PSG, give or take the odd PSG balance on some MSX modules (8250/55/80, to name some). Maybe it can be tweaked in hardware, dunno, but then you run the eternal MSX risk that one person has a different configuration compared to the other, making it hard to predict what your artwork will sound like. (these differences among MSX systems and expansions are one of the major cons of MSX btw, the defined 'standard' was way too small)

True, but that's a matter of changing some registers, like Micro Cabin did. And the PSG actually complements the FM drums greatly.

In a way that is true, but it's not much of a bother for me. Again: Micro Cabin uses that same chip.. you feel their music lacks behind?
Still, the sentiments you vent have some fundamentals. With software like Moonblaster there's not much we can actually do, other than note-on and note-off. We have volume, the software voice also has brightness, we can pitchbend and vibrate but that's about it. If you'd have precise control over volume, pitch, note lengths etc. at interrupt level, your whole chip would sound fresh again. With the Music Module you'd compensate that (a bit) by changing the voice data, which the FM-PAC can't do for its hardware voices. It may be that this particular situation in MB has such a big impact on people that it'd be easy to rate the Music Module a great deal higher than the FM-PAC.