The market's definitely not dead, but I do agree with the rest of the commenters above that it's a small(er) market. In addition, horror, unlike SF/F, goes through phases of ups and downs. It really boomed in the 80s, but then fell off rather quickly to the point that in the 90s and early 2000s the question was being asked "is horror dead".
Currently horror is going through another one of its perennial phase shifts. We saw the incredible surge in romantic vampire, undead hunter, and horror romance novels late last decade. Earlier in the decade we had a glut of zombie novels. Currently there appears to be two upswells - another one for zombie novels and one for more traditional or gothic horror novels. The upswell in zombie novels likely won't last, but will be fairly popular for a couple more years to come in my opinion. The more traditional horror novel, that's here to stay. Gothic traditional will be around for a couple of years as well, but it's really traditional style horror that is going to be around forever.
Last of all, we're going to see more and more new horror authors coming on the scene in the future. Our own Damien Grintalis (hi, DG!) has a new book, INK, coming out this year and several other new horror authors are advertising their works up on the Announcements forum. Many of these new authors will choose to go the digital route, but more than a few of them will stick with the more traditional publication routes exclusively. In my opinion the smarter ones will go both ways, placing their less "traditional" works in the digital markets while submitting their best, longest, and more traditional works to more traditional publishers.
One concern I do have is the loss of markets for short horror fiction. We are currently down to only a handful of traditional publishing outlets for short horror stories. However, the digital field is wide open for new magazines and routes of publishing digitally. There are apps available for the iPad and Android tablets that allow almost any individual to digitally publish their own magazine and many ways to distribute said digital magazines. It will require someone with publishing savvy and some money or backing to do this, but digital publication is vastly less expensive than traditional publication. So inexpensive, in fact, that it can be done by almost anyone with a little extra time and some editing experience (I could do it, and have in the past, but editing a magazine is a time-intensive undertaking if you want to do it right).