I don’t think Donovon was actually embarrassed by Dylan’s performance of “It’s All Over Now, Baby Blue”. For one thing, he specifically requested the song, he knew what he was getting into. I think people are understandably projecting onto just how thoroughly mediocre Donovon’s song is next to, like, a masterpiece. What I’ve grown to like about the scene is how it shows a very simple example of the difference between a wannabe and the real thing. I don’t know precisely what “It’s All Over Now, Baby Blue” is about, but I’m certain it was written in response to a specific situation. Something ended, and Dylan was compelled to describe and comment on it. The imagery feels so specific (“Your lover who just walked out on your door / has taken all his blankets from the floor”) that I wonder if he swapped out a few words to more properly convey the meaning to an otherwise disinterested listener. We have a better idea of what an empty-handed army is than we do, like, Sharon and Betty and Delia what who are Kate’s friends. Whatever the specifics, Dylan is using music to accomplish something other than the performance of music. By comparison, Donovan’s song is about him playing a song, it being good, and you liking listening to it. Something happened to Dylan, and he thought it over, considered what it meant, and came to a conclusion, with the song acting as a full stop at the end of a sentence. Donovan fantasised about being a good singer, and didn’t go any further. The depth of a work of art is a combination of the number of thoughts that went into its construction and the elegance with which they hang together.
(I have very little doubt that Dylan is deliberately owning Donovan. Even without the broader context of his biography, let alone the rest of the movie, look at that shameless shit-eating grin.)