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Video games used to be a social event, now everyone plays them in solidtude.
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Not to go all socio-economic, but I think this is partly a function of money. When I was a youngster growing up, no one had enough money to buy video games except for the few richest kids. Yet everyone had a few quarters they could plunk into a machine now & then. In my town they had a soda shop in the front/arcade in the back. That was when games like Centipede, Ghosts & Goblins, Sky Shark, Gauntlet, and their kind were in rotation. The two-player games were great fun. We even hit the arcade in the college a bit because it had fighting games & light gun games. (I would always fan the light gun with my entire hand, resulting in an uzi-like spray of bullets across the screen, quick-reloading about 20 times per minute.

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Now, when people are out in the "real world" (not in some fake WoW instance), if they are a gamer they are more likely to have a Nintendo DS or a Sony PSP to play "on the go" and have no need for an arcade. This is similar to those people on their cell phones who never actually participate in "real life," whether while driving

, shopping for groceries, or picking out a movie at the rental place. I've come to think these people actually have strong social phobia and couldn't go out in public without pretending to not notice those around them or actually take part in life.
The other thing that I noticed about early arcades (Pole Position, Pac-Man, etc.) was that people who were older at the time video games came about, say in their late 20's, seemed to play those games whereas when the industry crashed and the NES revived it, they didn't come along for the ride. For example, my folks played a lot of Pac-Man, Pole Position, Break-out... but they never touched any NES, SNES, or computer games.
Finally, another reason I think arcades are no longer needed is because home systems are so powerful. Back in the 80's and perhaps early 90's, arcade machines were always more powerful than any home system you could buy. Therefore, even if you were lucky enough to have a NES/SNES and a bunch of games, arcade games were still a draw because they were more advanced than what you could find at home.
Jam it back in, in the dark.