One afternoon, while Homer and Bart are watching The Springfield Squares, a highly distracting commercial is aired for something named "Gabbo". The advertisement is the start of a viral marketing campaign around Springfield to build interest in whatever "Gabbo" is. At one point, a distressed Rev. Lovejoy expresses his concern that the term "Gabbo" has fallen into common usage, in lieu of religious terms such as "worship" and "Jericho".
Finally, "Gabbo" is unveiled with great fanfare — he is a Howdy Doody-type ventriloquist's dummy with a voice that sounds like Jerry Lewis. Ventriloquist Arthur Crandall announces that Gabbo's new program will air in direct competition with the established Krusty the Clown Show, each afternoon at 4 PM. Gabbo's catchphrase — "I'm a bad widdle boy" — instantly charms his intended audience, and this has a negative impact on Krusty and his show.
The clown vows to withstand the competition from the new program, but Gabbo's cutthroat tactics and fantastic reviews quickly attract Krusty's audience. Gabbo even steals away Krusty's signature cartoon, The Itchy & Scratchy Show, since it would be exposed to far-higher ratings than the fast-fading Krusty. Krusty tries to fight back with a dummy of his own, but due to its gruesome appearance and poor condition, it falls apart on Krusty's lap, and scares off many of the child audience. Eventually, Krusty's ratings hit rock bottom, and after being left to air a poorly produced cartoon called Worker and Parasite ("Eastern Europe's favorite cat and mouse team"), his show is cancelled.
Left without work, Krusty falls on hard times and begins suffering from depression. Meanwhile, Bart and Lisa — all along unimpressed with Gabbo — reveal to him a plan to get him back into the public eye: expose Gabbo as a profane flash-in-the-pan, and plan a huge prime-time special starring Krusty. Believing there still may be hope for himself yet, Krusty agrees.
After Bart begins derailing Gabbo's success, by secretly turning on a studio camera (after distracting the camera man, who apparently is "quite low brow", with a supposed bodily limerick graffitied onto the mens restroom), which catches Gabbo bad-mouthing his audience on-air, he and Lisa begin recruiting major celebrities to appear on Krusty's special: Bette Midler, Johnny Carson, the Red Hot Chili Peppers, "Sideshow" Luke Perry (Krusty's "worthless half-brother") and Elizabeth Taylor. Taylor declines Bart and Lisa's invitation, much to her later regret.
Bart and Lisa return to Krusty to declare their success, only to find him morbidly obese from drinking several fatty milkshakes after believing them to be weight-losing shakes. Fortunately, the entire Simpson family helps get him back into shape before the special airs.
The show is a success, and later at Moe's Tavern, Bart makes a toast; "To Krusty...the greatest entertainer in the world! (Except Johnny Carson whos dancing while playing the acordian and balancing Jasper and Grampa on his head with a table).
In 2007, Vanity Fair named "Krusty Gets Kancelled" as the ninth best episode of The Simpsons. John Ortved felt, "This is Krusty's best episode—better than the reunion with his father, or the Bar Mitzvah episode, which won an Emmy much later on. The incorporation of guest stars as themselves is top-notch, and we get to see the really dark side of Krusty's flailing showbiz career. Hollywood, television, celebrities, and fans are all beautifully skewered here."