On paper, Willow should've been a massive hit.
For starters, the film offered up a new world and characters created by George Lucas, a guy whose name was still red-hot five years after bringing the original Star Wars trilogy to a close. You had Ron Howard directing, which seemed like a slam dunk after the one-two punch of Splash and Cocoon. The film had a talented, likable cast - including Val Kilmer (operating at the height of his powers), Joanne Whalley (who'd been killing it onscreen in the UK for some time), and Warwick Davis (hand-picked by Lucas to star in the film after making an impression as Wicket in Return Of The Jedi) - and told a classic "good trumps evil" tale. It had a sizable budget, the full support of MGM's marketing division, and an array of (then) cutting-edge special effects at its disposal.
At the time, Lucas envisioned E.T. levels of success for Willow, and it was obvious the studio hoped the film would launch an all-new franchise, a fantasy equivalent to the sci-fi of Star Wars. Considering everything the project had going for it, those expectations didn't seem insane.
Willow was not a disaster upon release, but it certainly wasn't a success on par with E.T. or Star Wars. The film, production-budgeted at $35m (a not-inconsiderable chunk of change at the time), earned $8m on its opening weekend, and went on to earn $57m at the (Stateside) box office. Foreign ticket sales and home video sales were both strong enough to ensure the whole thing went into the black before it was all said and done, but clearly this wasn't the runaway hit MGM and Lucasfilm had been hoping for.
The film also failed to strike a chord with critics, or make any real impact on pop culture in general. Of course a non-starter's always going to be preferable to an out-and-out trainwreck (something Lucas experienced two years earlier, when he executive produced Howard The Duck), but still: any hopes for a fantasy-flavored Star Wars were dashed quickly.
So, why wasn't Willow a bigger hit? Though I've heard that exact phrase wondered aloud more times than I can count, the answer's not complicated.
Rewatching the film now, the first thing you'll notice is how transparent it is in its attempts to ape the Star Wars formula. Madmartigan (Kilmer) was clearly borne from the same "Devilish Rogue" mold that cast Han Solo. Willow (Davis) is the slightly-too-whiny-for-his-own-good stand-in for Luke Skywalker. The rough-and-tumble female lead, Sorsha (played by Whalley, and revealed in the film's tie-in novelization to be a princess), is basically just Leia with a broadsword. These characters are joined by a pair of comic relief sidekicks (Franjean and Rool), friends who constantly bicker just like C-3PO and R2-D2. There's sorcerers (Jedis) using magic (The Force), a mentor who trains the hero to use that power himself, and an evil fascist (Bavmorda/Darth Vader) to contend with. Obviously, the genre change keeps things somewhat interesting, but the similarities are so blatant that one can't but feel like the whole thing's a bit of a retread.
A not-very-good retread, at that. For starters, Willow cranks up A New Hope's earnestness to eleven and leaves it there for the duration of the film, to the point where things get to feeling very corny, very quickly. On top of that, the whole thing's just a slog to get through. It's got its battles and its gee-whiz special effects and a degree of forward momentum, but on the whole something about the film has always struck me as incredibly inert. Part of that is the bland production design, part of that was Howard's then-underdeveloped ability to orchestrate exciting set pieces, and part of it is the sense that you're watching a story cribbed from a much better movie. Willow feels like a grand adventure as designed and executed by computer, and so most people shrugged it off. Cool story, bro.
It's a shame that screenwriter Bob Dolman (whether under direction from Lucas, MGM, or an ill-advised sense of deference) felt obligated to hew so closely to the formula established in Star Wars. It's also a shame that Howard directed. Though Howard would go on to direct a handful of legitimately great films (the most recent one being the criminally-underseen Rush), my suspicion is that he simply wasn't ready to take on Willow at that stage in his career. It was the biggest budget he'd worked with at the time, he was working in the shadow of George friggin' Lucas, and...well, look, even today Ron Howard isn't what you'd call a "visionary" director. Willow, with all its world-building and effects and tonal changes, needed someone with a firm directorial hand and an eye for spectacle. That ain't Ron Howard.
Willow never got - and, despite vague suggestions to the contrary, will probably never get - a sequel, but it's worth noting that, years after the film failed to establish itself as a franchise, Lucas teamed up with X-Men comic writer Chris Claremont for a novelized sequel trilogy, Chronicles of the Shadow War. Even if you're not big on the film that Howard made, you gotta admit: that's a pretty cool thing to have done for the fans that the original does have. It's also pretty cool for Hollywood to have rolled the dice on a big-budget, sprawling fantasy-adventure featuring a little person playing the hero (that said little person was noted badass Warwick Davis only makes it that much cooler). Oh, and while I'm saying nice shit about Willow, I'd also like to add that Val Kilmer is legitimately great as Madmartigan; watching the film, you can really tell he wanted this thing to work out.
Anyway, the interesting thing about Willow is not that it failed, or even that it failed despite its pedigree. What's interesting about Willow is, it illustrates that George Lucas himself - armed with a decent director, an accomplished cast, and the full support of a major Hollywood studio - could not replicate the success he'd found with Star Wars. If nothing else, Willow's legacy is instructive.