Everyone sort of nailed a little bit of it, but not the whole reason. Sorry for the long post, but you guys need a culture lesson.
Yes, it is a culture difference. Population density is one factor.
The main reason that the Japanese culture revolves around riding trains to get places and thus meeting in public to do hang out. Yes, there is driving too, but typically most Japanese people live far away from the main downtown/city area where everything happens (which is always right next to a train station). So, when you leave your house in Japan, you are out for a while. You don’t just drive/go somewhere and come back home (most esablishments don’t even have parking, and if they do, it is pay parking)–when you’re out, you’re out and when you come home you’re not going anywhere far for the rest of the day. You walk or take a bus to your nearest train station, which takes anywhere from 5 to 45 minutes depending on your closest train station, then wait for a train to take you to the nearest downtown area.
As a result, people don’t just go hang out at other people’s houses. First of all, they’re smaller, and second of all many younger people live at home with their families until a much older age than in the US (since apartments are so expensive, especially in Tokyo area). It’s a very big deal for a Japanese family to have visitors, and you definitely don’t go just to hang out and play video games for a while. As a guest in a Japanese home you’re expected to give your full attention and speak to everyone in the family. Also, people’s houses are extremely inconvenient to get to, since they’re typically far away from their closest train stations.
So, Japanese society is built around giving people places to hang out in the main area of each city near the central train station. This is why there are tons of coffee shops, karaoke bars, and drinking restaurants (which there is really no equivalent to in the US) all over town. Game centers (arcades) are just another one of those establishments–it’s just a place where you can play video games with friends or with strangers. When people play video games at home, it’s typically RPGs or adventure games which can be enjoyed by themselves. This is why it’s never a big deal when the big fighting games do not come to console, or get arcade-perfect console ports. There is no need to own a joystick, PS2, or any fighting game to play fighting games competitively in Japan. You can get all the practice you need just by playing at the arcade, and arcades with fighting games here typically carry Arcadia magazines which have more detailed move lists and strategies which are free for anybody to browse.
This is why game centers (arcades) will never die in Japan. You do not play fighting games at your house, because people do not come over to your house to hang out, you meet them in public where there will always be coffee shops, karaoke, drinking restaurants, and game centers to meet at and hang out. Additionally, even for online games, Japanese gamers typically play at Internet Cafe’s, not at their own house or apartment!
America, on the other hand, is a culture that revolves around driving and cars. In most areas you typically have to drive to get anywhere, and meeting friends at their place to hang out is pretty common practice. So, there is no point in going to an arcade to play video games, you can just do it at your friend’s house. If you haven’t noticed, the only places in America that still have typical “arcades” are places with lots of foot traffic–malls, university areas, and downtown areas. These esablishments would not be making money any other way, because the typical American would not have any reason to go to an arcade unless there is one around where he is travelling/hanging out by foot.
When the arcade scene was huge in the US, there was a distinction–the video games you could play at home were no where near as great as what you could play at an arcade. But now, games available on consoles are either arcade-perfect (to the average gamer’s eyes) or even better than that. This is why the arcade scene died in America but is still going strongly in Japan.
So, now there are very few arcades, and the truly hardcore fighting game players still in the US all meet right here on SRK.com. If you want a true, hardcore arcade scene that will never ever disappear, move to Japan. The future of gaming in the US is at home, which means for competitive gaming, online is the future. For fighting games, this is bad news right now because of the limitations of current technology, but hopefully when Internet 2 rolls around latency will become much less of an issue and the hardcore fighting game scene may see a revival.