Having lived through nearly the entire arcade phenomenon (I was there when Atari was king of the world), I staunchly disagree with the notion that there was one great, terrible event that “killed” arcade gaming. What exists now is just the end result of a long, steady evolution with plenty of ups and downs and has adjusted to a reality that’s vastly different from 1978 (or even 1998).
If I had to point to one really big factor, it’s that the types of games that were once the arcades’ bread and butter…beat 'em ups, platforms, shooters, racers, simplified sports, etc…are now either free online or available at a bargain price on the portable systems. (Never leave the portable systems out of the discussion, especially considering the colossal strides they’ve made since the first Game Boy.) There will ALWAYS be a demand for simple, easy-to-learn, fast-paced, cathartic, fun gameplay, whihc is what arcade gaming is, there are just far better sources than the arcade now.
So in a sense, it’s a double whammy for the arcade owners: They’ve lost their traditional customer base, and the new generation of hardcore players…y’know, the guys who actually enjoy spending hours practicing plays on Madden or fine tuning their Gran Turismo supercar to perfection…doesn’t want to slog to the mall just to play some inferior version.
Ultimately, I think most of the surviving arcades will follow the “if ya can’t beat 'em, join 'em” mentality and get their own consoles (which this one local place I used to go to a lot did recently). Actually, this may be the best strategy. Think about it: Who do you know who owns a PS3 and an X-Box 360 (never mind a Wii)? But an arcade owner, who regularly shells out upwards of $5,000 for a single cabinet, would have no trouble getting not only every system available, but the proper peripherals. And believe me, there are a lot of players who would definitely go for that. (I swear, if I ever have to hunt for instruments for Guitar Hero or Rock Band again…)
And if all else fails, there’s always Island Fruit. 
(Hey, don’t laugh. That’s probably the only reason Tilt still exists.)