The problems on the manufacturing end notwithstanding, the locations started all dying off as arcades closed down.
I'd think about it like this: Sega was always at the helm of arcade technology, and the story of home consoles in the 1980s was getting closer and closer to bringing the arcade experience home. When Sega developed the Dreamcast in 1998 it was built on a system that basically used the same brain as their arcade games; the home version was no longer an adaptation or emulation of the arcade version. (It's in this context that around this time is when Sega--always known for "arcade action" starts making almost these, like, anti-arcade gameplay titles; self-referential and experimental stuff like Seaman, Shenmue, etc.).
Games started getting longer (and, IMHO, more boring). Meanwhile, production got cheaper (in the sense that a DVD could contain 60 hrs of gameplay) and distribution changed. The psychology of gameplay changed, the approach to game design changed, and the entire market ecosystem changed.
From a casual player's perspective, pinball is expensive for what you get.
From an operator's perspective, pinball is not as lucrative as other amusement machines.
From a production standpoint, pinball is not as lucrative as other amusement machines.
The only games or styles of games that survived in the arcades / public places that survived had to satisfy at least one of these criteria better than pinball did.
That's just my $0.04, which is twice what I'd normally pay, because pinball was always twice as much as the video games.
(edited to add bad joke)