I suppose that the traditional "American Musical" did end--That's spelled "Hello, Dolly!" by the way.
Most of my favorite musicals were long after that--stuff like Tommy, Hair, The Rocky Horror Picture Show. Which is to say, rock operas were perfectly viable and may be still. Have you ever seen Dr Horrible's Sing Along Blog?
Webber's stuff is also long after the '60s.
But yeah, I suppose the audience fragmented. The traditional concept is that literally everybody watches the big movies; since the mid-60s we have more fragmented audiences, divided into subgroups each of which sees the movies they think are big but with people in other subgroups never even seeing the biggest of another group's movies.
Presumably in what a Westerner, or for that matter a humanistic libertarian (note the small letter "l" please) Marxist like me, would find the worst sort of Soviet victory (also least plausible though most often imagined) where a police state (yes, the police work for the Party--so what?) repressive quasi-Stalinist global regime somehow comes about, mass conformity would still be desired, also of course one has a "one product is on offer, take it or leave it, and people who leave it stand out as weird, comrade!" sort of economy across the board and certainly in mass culture. Presumably Soviet audiences persisted in showing up at Soviet studio produced blockbusters because it was the only movie to go to that season and everyone did so and if you didn't you'd be left out of conversation. Part of what happened to the American cinema scene was that it became easier for small studios to compete with the big ones and great diversity of options were offered the audience, which contributed to fragmentation. If there were a Brezhnevite sort of world order but it gradually "thawed" with rising material prosperity and the cultural ministers decided to open the floodgates and support lots of little artists, just let them make whatever they wanted within broad guidelines and after predictable censorship for basic standards, there is an initiative to build extra cinemas and put each one under the control of a different workers' soviet, letting each decide independently which of the offered movies they wanted to show, I suspect that over time in such a regime, assuming it didn't suffer a counterrevolutionary crackdown, something parallel to what happened to American movies would happen. There would no longer be single movies of any genre that predictably, year after year, command the whole audience. That would happen from time to time anyway, but it would be unpredictable which of the forming genre clubs the runaway hit movie would come from. One year it might be a romantic drama, another year a romantic comedy, the next couple years there is none and people just watch their favorite types and have their separate opinions which was "Best," then the next year there's a science fiction movie that takes the world by storm, and the year after that a detective drama stands out from the crowd of imitation SF movies. Some of the breakthrough movies are musicals, but few are of the traditional kind. I don't know if a Soviet dominated world would foster rock as such, let's call it "edgy industrial-punkified folk" instead!
Now if instead of this libertarian fragmentation of the audiences into alternative camps the regime foresees this as a danger, and tightens regulations down to orchestrate the more or less creative community to produce quotas of predetermined genres, including the seasonal musical, along with the seasonal planned detective story, the planned highstrung family drama, the planned comedy... if the state keeps tight control than what choice has the audience but to watch what they are given and enjoy it as best they can? OTL in its "golden age" the Studio system essentially did the same thing for or to American audiences, the difference being that there were several competing studios (in the Golden Age proper, each major studio owned its own, or anyway had tight relations with, a franchise of theatres, so you had the MGM theater, the Paramount theatre, the Columbia theatre, etc---no chain would show its competitor's product but in decently sized towns, the audiences could go to one or the other as they chose.) But there were few competitors and they all aimed largely at the same audience base--each had a bit of a speciality but they overlapped more than they differed, so it was like being given the choice between Coca Cola and Pepsi, but not having the option of a strawberry soda, let alone chai. It is not the state controlling Golden Age Studio offerings but parallel judgements by moguls hoping to capture the lion's share of ticket revenues this season, all making the same judgement calls at the same time more often than not. The Soviet version of this has one state body deciding much as the moguls did, except with the agenda of also driving home whatever party line message the Party wishes to stress as well.
How else could it go? I don't believe a Soviet system could win out over capitalism unless it successfully resolved some serious drawbacks of OTL Soviet practice. If we have an ATL where the Soviet economic system manages to be worker controlled and subject to central control but also to incorporate some kind of demand driven flexibility, with redundant channels so that alternative approaches can be tested against each other, and this also leads to more effective worker democracy, then I believe such a Soviet system would stand an excellent chance of eventually outcompeting capitalism and eventually the last capitalist holdout states would collapse in revolution, while the intermediate process would be peaceful adoption of this alternate Soviet system piecemeal and having it complete itself and become global.
Such a system would come sooner or later to resemble what I predicted for Jello Biafra's UASR--as support for artists rises and rising prosperity opens many channels for expression, artists become artier on the whole and the audiences fragment but generally demand higher standards of art in one form or another; different audiences might despise the canon values that develop in other audiences but each canon type will become more sophisticated in its own way. The range of choices at any time would be quite rich and broad.