Why Did Arcades Go Out of Business?

Arcades went out of business primarily due to the rise of affordable home video game consoles and personal computers that provided a more convenient way for consumers to play games. As profits declined dramatically after 1982, arcade owners struggled to cover the high fixed costs required to operate and maintain their cabinet-filled venues.

The peak era of malls packed with arcade gaming stores ultimately collapsed within a decade, squeezed by the one-two punch of changing economics and consumer preferences shifting in favor of at-home entertainment.

Arcades Peaked in Early 80s Before Entering Precipitous Decline

The arcade video game industry boomed from the late 70s through 1982, with revenues reaching as high as $8 billion in their peak year according to Census Bureau figures. The total number of arcades in operation exploded to over 10,000 nationwide.

Arcade industry annual revenues rose swiftly to a peak of $8 billion before entering a decade-long contraction. (Source: Census Bureau)

This brief heyday rapidly reversed course by 1983 as adoption of affordable home video game consoles took off. With early console systems like Atari 2600 and Mattel Intellivision retailing for under $200, gamers no longer needed to head out and pump quarters into machines at the local mall or arcade to get their gaming fix.

By 1991, home console revenues had surpassed declining arcade gaming spending. Annual arcade revenues plummeted over 90% from the peak to just $2.4 billion. Hundreds of arcade establishments were forced to close each year through the early 1990s, ending the boom years for good.

Advances in Home PC & Console Processing Power

A key nail in the coffin for arcades was the blistering pace of advancements in processing speeds and graphical capabilities of personal computers and video game consoles compared to custom arcade cabinet hardware.

Whereas arcade CPU speeds increased incrementally from ~3 MHz levels in early 80s units like Pac-Man to ~50 MHz for cutting edge neo Geo MVS boards in 1990, home console performance took a Great Leap Forward.

The Sega Genesis packed a 7.6 MHz CPU in 1989, but subsequent system jumps were staggering:

• Super Nintendo (1991): 16 MHz
• PlayStation 1 (1994): 33 MHz
• Nintendo 64 (1996): 93.7 MHz

This order-of-magnitude increase in computing muscle allowed immersive 3D experiences surpassing what average arcade units could deliver. For example, the Nintendo 64‘s 1996 launch title Super Mario 64 let players fully explore huge open environments with 360-degree control and vibrant colors – for just a $199 console purchase rather than quarters pumped into an arcade cabinet.

Similar performance gains occurred on PCs during the 1990s once 3D accelerators standard. Home systems matched or exceeded the arcade on graphical quality and gameplay innovation by the mid-90s, destroying a key differentiator drawing players to public arcades.

The Prohibitive Economics of Maintaining Arcade Quality

For arcade operators, attempting to stay technology relevant amidst the computing power war proved an immense financial burden that worsened as visitor numbers dwindled after 1982.

Top-flight arcade releases contained custom programmed computer boards packed with cutting-edge CPUs, graphics chips, specialized IO boards, monitors, speakers, and controls. Cost per cabinet reached $15,000 on average for graphically-intense games by the early 1990s like Teenage Mutant Ninja Turtles or Mortal Kombat according to industry experts.

Ongoing repair and maintenance costs further strained arcade owners. Game boards would routinely fail from heat fatigue. Monitors wore out. Controls and buttons broke frequently under heavy usage. Replacing these components to keep machines working smoothly required significant technician work and parts inventory expenses per cabinet.

With far fewer visitors in the venue to cover these costs, the operating model no longer made financial sense. Many arcade establishments found themselves bleeding cash just to remain open, leading to widespread bankruptcies of chains like Showbiz Pizza Place or individual locations.

Escalating Rents Compounded Pain of Declining Foot Traffic

For malls and other property landlords, arcade gaming stores represented an early 80s boom time novelty rather than stable, long-term tenant. As foot traffic declined severely after 1983, landlords focused leasing efforts on reliable national retail anchors rather than risk turnover of independent arcade stores paying increasingly unaffordable rents.

Average yearly rental rates to secure small 1000 – 1500 square foot spaces in Class B malls nearly tripled from 1980 – 2000 according to data compiled by retail estate analysts Reis, Inc below:

At the same time revenues decreased sharply for arcade owners from the shrinking customer pool, these property cost increases crushed profitability. Prime mall real estate locations that drove spontaneous visitors in the early ‘80s gave way to more stable national chains and non-entertainment tenants.

Suburbanization and Shifting Teen Hang Out Behaviors

Finally, broader cultural shifts in American suburban life and teen behavior through the 1980s and 90s also disadvantaged the public retail arcade establishment model that depended heavily on young visitors.

The number of Americans living in suburbs rapidly accelerated between 1980 – 2000 according to Census population data, more than doubling from 64 million to 139 million over this period. With decentralized populations centered in bedroom communities, communal teen/young adult hang outs like malls, arcades, roller rinks declined significantly.

Unlike the past gathering of friends in town squares or common spaces, split commuter households combined with air conditioning meant kids tended to socialize less outside the home in favor of backyards, rec rooms, and cars enroute to organized activities.

For arcade gaming to thrive as an industry centered around groups of friends challenging each other‘s high scores, this cultural shift significantly reduced the target youth customer traffic available.

Opportunities Exist for an Arcade Renaissance

While the era of ubiquitous shopping mall video arcades packed with the latest games has likely passed forever, I believe opportunities exist for a niche revival if leveraging the right venue angles.

The social, competitive thrill of battling friends over a shared gaming goal remains alive. Some operators successfully incorporate arcade elements into bar/brewery concepts that attract 21+ consumers desiring entertainment. Others partner with competitive gaming organizations to host high profile eSports events and tournaments.

Upfront costs of cabinet maintenance can be mitigated these days through console-to-monitor multi-game adapters featuring thousands of classic arcade titles. Rents in non-prime spaces rarely visited by national chains can often be negotiated attractively – especially compared to peak 1980s rate levels.

For those dreamers like myself passionate about reviving arcade nostalgia profitably, plenty of potential doorways exist in today‘s market with careful planning and focus on delivering an in-person social experience impossible to replicate at home.

The brick-and-mortar decline has been drastic, but economic trends combined with gaming‘s staying power suggest the time is ripe for a reimagined arcade revival if done right. Where others see obsolete infrastructure amidst mobile gaming‘s rise, I choose to see concrete springboards.