Alt, many of your points could be directly applied to the movie theater industry. Why build these huge multiplex theaters with tons of needlessly expensive equipment and stupidly overpriced food when the studios could make more money by simply selling directly to the consumer via DVDs to watch at home? Or maybe they could gather at someone's house to watch it. But people don't always have the equipment to watch it at home, or it's inferior to the theater, or most importantly, they want to enjoy themselves with their friends by going out.
Likewise, arcades have dedicated equipment for the games, provide a convenient socializing spot, and have the highest fidelity for gaming experience (lagless, etc). Unfortunately, there aren't a lot of arcades anymore because of several reasons, one that the AMAA is run by a bunch of retards, there's a serious stigma in city management against issuing game licenses for arcades, most (good)games are created for the Japanese market instead of the American market, and most arcades still operate by charging quarters since it's the most cost-effective way of operating (but also labor-intensive and doesn't allow for incremental changes in pricing to compensate for inflation).
Also, you bring up the superiority of net-cafes as a venue, when it's the net-cafes that one of the most difficult business models to sustain, period. The net-cafe boom of the late 90's/early 2000 era has been obliterated, and us closing Interface in Simi Valley is yet another one that bites the dust. The best net-cafes have the benefit of corporate sponsorship, but that's not something most small businesses can handle.
I also wouldn't want to host 20+ people at my house on a regular basis to sustain a fighting game scene, with the food, drinks, utilities and other accommodations necessary to support that many people. It's far more easier to arrange an event at an arcade since it already has the infrastructure to support large amounts of people, short of renting out a convention center or hotel.
You're absolutely correct on the point that the arcade business model doesn't generate enough profit compared to the cost of operations, though. There's not a whole lot of help or infrastructure for us to advance the system, however.
