The Rep has been struggling financially for years. I know they've been bailed out by the city at least once in the past five years. The shows they chose tended to be very eclectic at times, and I think this made it hard for them to attract a dedicated audience. The company took a lot of chances on unknown quantities, like The Snow Queen: A Musical last winter. While this assured lots of creative programming, the quality of the plays was often uneven.
There was also the problem of the venue. While the San Jose Rep theater was decent for plays, it was absolutely awful once music was introduced into a show. The acoustics would warp even the most talented singers into shrill, distorted warblers. So even a musical that had proven to be a huge hit elsewhere, like Spring Awakening, sounded merely OK at best on that stage.
Even though the Rep offered very competitive student rates, I really didn't go that often because of the aforementioned problems. In this area, there are lots of other theater companies, so my entertainment budget ended up lining the pockets of San Jose Stage Company, Theatreworks in Mountain View and The Berkeley Rep because they consistently offered better shows.
I'm still quite sorry to see the Rep go. I hope that they'll be able to regroup and restructure the way Shakespeare Santa Cruz did recently, but it may simply be that with so many other live entertainment options: opera, ballet, symphony, concerts, and other playhouses competing for the attention of the theatre-loving audience, San Jose Rep was just one stage too many.