Lua is very popular in some niches, like games and embedded stuff.
Language adoption is a very social thing though. Maybe if Rails was a Lua framework we would be wondering why Ruby never made it big.
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Agreed.
Lua is embedded in things like Redis, and is often uses as an extension/configuration language for small projects.
I based my mail client(http://lumail.org/) around Lua as a configuration language because I kept getting annoyed by the almost-configuration-language used in mutt.
Actually writing applications in Lua is also possible, for example the chat/Jabber server Prosody.