Philly's best arcade was Gameworks. It had two DDR machines which always drew in a regular following. They also managed to keep up to date with fighting games. I remember they had SVC Chaos when it was still new, and I enjoyed being the only one of my friends who knew anything about how to play as the SNK characters. Unfortunately they closed down a few years ago and the only arcade near me (aside from Dave & Buster's) is a tiny one in a mall. It woulda been fairly decent considering its size in the '90s, but now it just seems kind of sad. There's only about 3 games that seem like they'd have any draw and I've never seen it get crowded. Considering the popularity of Guitar Hero it seems strange that there isn't an arcade version. If anything could actually revive arcades it would be a hot property with large peripherals like that. DDR gave arcades something of a last hurrah since it was huge, easily enjoyable by new players, and hard to fairly replicate at home. Plus, with the really good players, it was actually fun to watch them try to break the record. Eventually I guess people got tired of that and saw it as more of a gimmick than anything and the crowds just dried up.
In Japan arcades are still alive and well thanks to the realization that these gimmicks would actually draw in crowds. Apparently there's some sort of hybrid arcade game/CCG that's big over there but I have yet to get in touch with my friend who was there to see it for further info. Sega's Initial D series is also very big there since it's both based on a popular anime series and provides the player with a way to save data to a card. You'd think more manufacturers would be doing that since it's nothing new (Neo-Geo anyone?) but it's apparently quite the novelty. Apparently Europe is toying with the idea of integrating video games into movie theaters [http://www.nytimes.com/2007/02/26/technology/26games.html?_r=1] but I couldn't tell you if this will be a lasting thing.
Personally speaking, I've felt the decline of arcades since sometime around 1997. That's when you could tell, at least here, that it just wasn't the same. Popular fighting games like Street Fighter 3 could be sitting around completely empty whereas before you would see huge crowds huddled around them. Owners weren't keeping up with the newest games as well as they used to, so relics like T2: The Arcade Game would be taking up lots of floor space. This had its charm to anyone who liked retro games, but no arcade game can stay active for that long and be in usable condition. The screen burn on the Ms. Pac-Man machine at my local Jolly Time was so bad it was nearly unplayable, and the player 1 A button on the Neo-Geo there was completely unresponsive. Sure, there was X-Men vs. Street Fighter, but as soon as you started playing you could be sure some veteran would run up and start using his 99-hit combo just as you were still figuring out how to play the game. It's this environment that, in my mind, made people really stop wanting to come. Sure, you had the most hardcore of the hardcore, but there weren't enough of them to keep the place in business, and the casual goers wouldn't spend enough time or money there. There was a middle demographic that was just not showing up. The late '90s/early '00s rhythm game boom didn't last long enough either.
It's possible that they could make a comeback, but one thing that's gonna have to change is the price. When the first 50 cent arcade games came out, the only reason people were willing to pay the premium was because the games were wildly popular. Street Fighter II drew people in. However, it then became common to price every game that way. That's not too bad, but then came the games with the dollar slots attached. Mad Dog McCree was the first one I remember seeing like that. When you price a game that high, you damn well better make sure it's something people will want to play. With the economy in that shape it's in, people aren't going to be willing to pay $2 just to play 3 songs on Guitar Hero when they've already got the game at home. Bringing the price down will bring back the less hardcore crowd and make the more casual crowd stay longer and be more likely to return. However, I don't think that's likely considering the justification for the pricing is that the hardware is so expensive.