Arcades took a few killing blows, any one of which could have probably ended the arcade fad by itself.
For starters, they were primarily an installation at malls. Sadly, the big box store paradigm that we now live in has caused a great many of our malls to close, being unable to compete with the business model players like Wal-Mart are using. Even those which still exist usually have experienced a significant, and severe hit to their patronage. Fewer people in the mall means fewer quarters in the machines.
Another consideration is that arcade games were often designed with predatory intentions. Frequently the difficulty of these games was amped up in a way that guaranteed frequent player death as a means to juice more quarters out of their pockets. This is just not conducive with the type of game design ethos that makes a title enjoyable and it turned off gamers in a big way. Arcades functioned essentially as a social center and once the novelty of the experience had worn off people were just left with the actual games, which were frequently not fun to play.
During a particular period arcade machines had the best graphics going. Home consoles simply couldn't deliver the same audio-visual experience. I, myself, remember pondering with youthful awe a time in which my game system would look as good as arcade machines. That time eventually did come and with it the end of one of the last sources of novelty the arcade actually had. Why would I go give them money to play a game I likely couldn't beat, and definitely could not take home when I had the exact same experience waiting for me whenever I wanted it?
Speaking of price, it's also worth noting the psychological aspects of spending money. In its earlier years, arcade machines usually costed a quarter to play. This was a small sum of money, pocket change that you probably had lying around at least once every few weeks. Even if you weren't a serious arcade enthusiast with a sack full of coins, you probably had a pocket full of quarters to spend once in a while. Towards the end prices shot up to the point you were spending an entire dollar for a play. Sure, a buck isn't really that much but there's a distinct psychological difference between spending a few coins you had laying around and parting with paper money. Suddenly it wasn't a fun diversion that was sort of built in to the way you managed you money, but an actual expense.
These factors combined have simply made the dedicated arcade a tough proposition for any business owner. Some do still exist, usually at one of the malls so large and full of novelty that they still attract a large consumer base. Others are "premium" arcades which feature things like virtual reality that you can't necessarily get easily or affordably at home yet (though that may be rapidly changing). But the venerable arcade experience from years past just doesn't fit into the culture of today, nor are they economically feasible.
It's kind of sad, too. It was a unique slice of life you cannot get anymore to have the neighborhood corner arcade for all the teens to hang out at.
