The peak and the crash
American arcade revenue peaked at approximately $7 billion in 1982 — a figure that exceeded the combined box office of the American film industry in the same year. Approximately 24,000 arcades operated in the United States at the peak. The revenue came from coin-operated machines that maintained a technology and visual capability gap over home consoles: an arcade Space Invaders or Pac-Man played on hardware purpose-built for that game, with a dedicated monitor, proprietary controls, and processing power concentrated entirely on one task. The Atari 2600 home version of a game was an approximation of the arcade experience, and players who had played the arcade original knew the difference. The gap between arcade and home was wide enough that players paid quarters to access the arcade version even if they owned the home version.
The 1983 home console crash affected the arcade industry differently from the home market. Arcades continued to operate through 1983 and beyond because the product they sold — the specific hardware of the arcade cabinet — was genuinely superior to anything available at home. The crash depressed the home market without eliminating the arcade market's technological advantage. What eventually closed that advantage was the improvement of home console hardware through the late 1980s and particularly the early 1990s, as 16-bit home consoles (the SNES and Genesis) produced ports of arcade games that were genuinely comparable to the originals rather than clearly inferior approximations.
Street Fighter II and the fighting game peak
Street Fighter II (1991) produced the last major arcade expansion in the United States. The game's head-to-head fighting format required two players at one machine — a social dynamic that arcades facilitated naturally and that home play replicated only partially. Players who wanted to test their Street Fighter II skill against the best competition available went to arcades, because the best competition was there: the self-selected population of players who had invested enough in the game to visit arcades regularly were, on average, more skilled than home players who played casually. The arcade as venue for competitive gaming — where finding an opponent of comparable skill required only walking to the nearest machine — had a social function that home play couldn't replicate until online multiplayer matured.
The Street Fighter II boom — which also encompassed Mortal Kombat, Tekken, and the many fighting game competitors that followed through the mid-1990s — reinvigorated arcade investment and construction through 1992 and 1993. New arcades opened; existing arcades purchased fighting game cabinets in large quantities. The boom was the last period during which significant new arcade infrastructure was built in the United States. When the fighting game market contracted in the mid-1990s — partially from genre saturation, partially from home console versions (the SNES Street Fighter II: Turbo was excellent) closing the quality gap — the arcades that had expanded around the fighting game boom were left with floor space and overhead that couldn't be supported by other game types.
The home console catch-up
The PlayStation and Nintendo 64 closed the arcade quality gap at the same time that the American arcade industry was structurally overextended. A PlayStation running Tekken 3 (1998) was not visibly inferior to the Tekken 3 arcade cabinet in ways that would motivate a consumer to leave home and pay per play for the arcade experience. The home version was quieter, had no queue, could be paused, and was available at any time. The arcade's advantages — the specific hardware, the social setting, the competitive player pool — were real, but they were advantages that required a specific kind of player commitment to value over the convenience of home play.
American and European arcades had a structural disadvantage that Japanese game centres didn't share: the broader cultural setting. American arcades had, through the early 1980s, been associated with concerns about juvenile delinquency and unsupervised socialising — the same moral panic that produced local ordinances banning or restricting arcade operation in various municipalities. The social context that game centres occupied in Japan — a mainstream entertainment venue that adults frequented alongside teenagers, embedded in retail and entertainment districts where they attracted passing traffic — was not replicated in the American equivalent, which was typically a standalone or mall-embedded space that attracted younger players and was associated with parental concerns about appropriate youth activity.
What Japan kept
Japanese game centres — arcades — did not undergo the same commercial collapse that American arcades experienced through the 1990s and 2000s. The difference was partly demographic — Japan's urban density and transit-centred lifestyle created foot traffic patterns that sustained retail entertainment venues — and partly cultural: the game centre in Japan was a mainstream venue for adults, not a space primarily associated with unsupervised teenagers. Arcades in major Japanese train stations attracted adult commuters who played rhythm games, medal games (coin-pusher and slot-style machines), and competitive fighting games on their way to and from work.
The rhythm game — Beatmania (1997), Dance Dance Revolution (1998), Guitar Freaks (1998) — was a category that the Japanese arcade sustained and that the American arcade couldn't replicate at commercial scale. Rhythm games required dedicated hardware with specific peripherals (turntables, dance pads, guitar controllers) that were too expensive to own for most home players but affordable to access at per-play pricing. The games also required physical space that apartment-dwelling Japanese players typically didn't have. The category sustained Japanese arcade economics through the period when American arcades were closing, and produced a business model — pay per play for hardware too expensive to own — that was viable in Japan's dense urban environment and not viable in American suburbia where home-based entertainment was the cultural default.