By the mid 90's many Japanese game developers had started switching from the arcade platform to consoles and limiting exports of their newer arcade titles. Why do you think they made the switch? Could they not have kept the arcade industry alive, or at least kept both in succession as they had done for the last 20 years?
So there's two logical theories behind this shift. One is that the bigger game companies simply chose the path of least resistance, which the smaller developers from the arcades would then have to follow. This path followed the marketing driven business model, where games would not earn their salary from day to day, but instead sell through editorial exposure and review scores. This business model had already been proven successful through Nintendo in the 80's, and with the power and ease of developing for Sony's new Playstation console would allow third-parties massive potential profit from the 32 bit generation. This guaranteed a more or less set income to certain publishers, as long as the game maintained extremely high presentation values (such as those seen in Metal Gear Solid and Gran Turismo). The second, more accepted theory (that doesn't jeopardize anyone's job by mentioning) is that arcade manufacturers anticipated the rise of powerful, low cost hardware and simply could not compete with console makers and their huge volumes and R&D budgets, therefore the home console became more powerful than the big arcade cabinet of the former decades.
East Versus West
God Hand - 3/10?
So, while they started the write the arcade industry off there were still large amounts of innovative IP's on console being produced by Japanese companies, and yes, these games were often released in most major markets. Then what started to happen is that these console games too were beginning to be looked on with contempt by the Western Press, just as their arcade brethren had been years before. Games like Blood Will Tell and Disaster Report, which are both notable games for their really creative use of narrative and game mechanics were poorly reviewed by IGN and quickly sidelined to the review archives in favor of games like Jak & Daxter and Grand Theft Auto III. These Western console games would go onto get massive coverage and prestigious review scores, forming the tastes of numerous consumers for years to come. This imbalance was excessive to say the least, culminating in one of the most controversial ,but telling reviews of all time for a major gaming publication. Sadly, many Japanese developers are still trying to make their games more Western in the hope of reclaiming their position as major console sellers, hence fusion titles like Binary Domain and Resident Evil 6. Do they not realize that this is not about cinematics VS. gameplay, but rather about cultural bias and economic war? So what can be done about this tragic situation, whereby the franchise game that has so little innovation represents so much of the sales market, leaving everyone else poor and begging?
Return to our roots
Its sad how the arcade industries biggest developers shifted their resources to consoles, however I'd like to end by saying that operators outside of Japan should have pursued more alternative survival strategies than the ancient tried and tested model of redemption machines in order to keep the lights on. For example, imagined the arcades in the late 90's would have joined with consoles and internet cafe's to become public gaming spaces with different platforms that revolutionized LAN style console gaming years before Halo and its small platform specific community emerged? This is what arcades outside of Japan needed in order to survive, and they should have seen the market trends and reacted accordingly instead of expecting to ride out the storm through traditional methods.
One things for sure, if existing Arcades had continued to be serviced with new and innovative titles cinematic (i.e movie) gaming would never had taken a foothold in our gaming culture the way it has, and studios like Game Republic and Cavia would probably still be around, possibly even thriving as modern day Taito's/Tecmo's. Unfortunately though, the profits are being more and more divided up among Western gaming companies, who often favor graphics and multiplayer centric gaming over the rich single player experiences that defined Japan's great economic rule over the gaming industry.