I've been using Ruby on Rails for at least 18 months, and it is an amazing application framework. However, it's not suitable for all projects. For one thing, hosting is much more demanding and less mature. If you don't have at least $50/month for a VPS or equivalent you are not going to get the reliability you can get with PHP relatively cheaply.
The other thing is that Rails is geared primarily towards applications. In terms of arbitrary functionality, Rails is really the best thing going. It gives the web app developer tools to create raw web interfaces very very efficiently. Probably more efficiently than is even possible in PHP due to Ruby's dynamic language features like method_missing? and dynamic class modification.
However, most websites aren't applications. The majority of clients don't have the budget to build something from scratch (even if Rails makes that development 5 times faster). Content management is one of the most common needs of clients. Drupal's node-based architecture is not as flexible as a generic MVC framework, but its a more specific solution to an extremely common problem. Given the range of modules for Drupal, you can set up full-featured sites right out of the box.
However, all this built-in functionality exacts a cost in complexity. Drupal is an amazing architecure, but it can never be as easy to customize as Rails without fundamentally changing what it is. Rails, likewise, can't really implement anything like a Drupal module. Rails has Plugins, Components, Engines, and Code Generators, but none of these things work as seamlessly as Drupal modules, because Rails doesn't dictate any architecture beyond MVC and some basic hooks on that theme.
I'm still fairly new to Drupal, so my understanding doesn't run deep enough to outline where Drupal could steal ideas from Rails effectively (I know there are plenty). But I do know that Drupal is providing an indispensable tool for probably half of my clients, whereas Rails is a better fit for 25%, with the other 25% better off with a variety of other more lightweight tools that I use. I don't see them really competing at all.