In its short run, Family Guy was, on an average night, funnier than the average Simpsons night during that same stretch of time. Unfortunately, I don't think it hit home with the entire 18-49 age group that The Simpsons did. The Family Guy brand of humor tends to be "funny" to more college-aged people and less funny to those in their 30's and 40's. For some reason, The Simpsons manages to hit a really wide target audience, hence, it outlasted Family Guy. I don't agree with the decision, but that's what I've read about why Family Guy didn't last.

Plus, Family Guy was "the new kid" and The Simpsons was an institution. It's easier to win as an incumbent, and I guess Fox just decided that the animated comedy landscape was overcrowded with KotH and The Simpsons already.