Watch any nontechnical person using Windows or the Mac. When a file is saved (from the office suite, from a browser download, wherever) they usually have no clue where it went. There is then a hunt through various incomprehensible magic places to find the file when they want to attach it to an email, etc. Either that, or they avoid folders altogether and save everything to the desktop background, that being the only place they can find it.
Arguably, it's not the folders model itself that is broken but rather Microsoft and friends who have broken it by obfuscating the directory hierarchy away from the user and making crappy filepickers in each application rather than a simple, usable file browser that's common to the whole desktop. But in its current state, and for most users, the nested-folders model isn't working well.