Obviously, there was a bubble in the late 70s to early 80s. When something becomes a fad it gets artificially inflated and when the fad goes away you're left with a core. That's what I think happened in the early 80s. I think you can compare that to the Nintendo Wii craze. The first big hit to the Arcades might have had something to do with the Atari 2600/Coleco/Intellevision but I think people might be underestimating the effect of the steam going out of the fad.
So then from 82/83 to the late 80s you still had arcades but they weren't packed. They did make money though. There were still lots of places with games in the late 80s. Enter the NES. Most people are going to say "why play vs. super mario bros. at the arcade when I can play super mario bros. at home." That was what killed the core. The people who were playing because they authentically loved video games started playing the consoles more.
Being in that core, the major thing that kept me going to arcades was that the consoles never quite got it right. The games looked pretty much the same but they were always dumbed down or a level was removed or a cut screen was removed. I mean, has anyone here played DK Jr on the NES? It's so freaking easy. It's just not fun. I was never able to really get my fix in the arcades because I was young and didn't have $5 on hand at any given time. When I got play DK Jr. or Afterburner, Jungle King, etc. in the arcade it was a treat because I had to (1) FIND THE GAME and (2) have the money. I think a lot of people my age (mid 30's) are into classic games because we were always chasing ghosts (ba-dum-bump). I know Peter Hershburg talked about that. One reason he liked arcade games so much now is because he felt like he never got to play them in back in days because he was a broke kid.
One thing people are starting to figure out now that arcades are pretty much gone is that a good game is easy to learn but hard to master. Whether were talking about Chess or Ms. Pacman, that holds true. Consoles don't really provide that experience. Most games now use so many buttons and combos that you have to be a gamer to easily pick them up. And you can't play a modern game for 5 minutes. You have to sit down for 30 minutes to several hours to really play a lot of games. I don't think your average person wants that. The Wii started to hit on that (and profit from it) but what I'm seeing now is iPod apps. Lots of simple games like Tubez that are very much like older arcade games. I really like modern games too but I think they alienate your average person.
The other thing that deserves mentioning is that, if home consoles killed arcade games, then what the hell happened with pinball? Pinball is pretty much deaded now too but you can't reproduce pinball in the home (unless you buy a real machine.) Was pinball piggybacking on arcade popularity or is something else going on there?