Consoles couldn't surpass the arcades, because the arcades were like PCs: they could always be upgraded. Nevertheless, by the time the Dreamcast came along, consoles could produce accurate enough arcade conversions that the arcades were no longer seen as necessary. And to make it worse, PCs also had the ability to continuously upgrade, making the arcades redundant. And like you mentioned, the rise of online gaming also ended up becoming a replacement for the kind of social gaming that the arcades were known for, though social arcade gaming is still alive and well in Japan.
the decline of the arcades had nothing to do with thbat. the reason the arcades declined as because home consolkes had started to surpass actual arcade hardware technology. that and online gaming meant in the west at least the market for arcades was gone. I still mis it every day
that doesn't matter. arcades could be upgradable but what;'s the point when the whole graphics revolution was behind us. it's been behind us for 10 years, rthe bets looking games on pc look barely better than good looking ps3 or xbox360 games. the differencesd are marginal to the normal eye