Not every arcade cabinet has to take up a small room’s worth of space – although for them to actually be useful in any given venue cabinets in the micro-category tend to not gain any traction unless you make one for yourself. Here are a couple of tiny arcade cabinets, both use the Nintendo Gameboy Advance as a means to miniturize the arcade experience. It would be a DOA idea but I now wonder what an entire arcade would be like using nothing but tiny cabinets. It would certainly appeal to kids, at the very least. You would have to use a card swipe system, which readers would be about the same size. Light-gun, driving and dancing games would all be pretty difficult to pull off though, so it probably wouldn’t go very far but who knows, if it was nothing but micro-cabs, there could be some strange appeal just out of that.
There are a bunch more videos on Youtube of mini-arcade cabinets as well, I’m sure you can spend a good chunk of your weekend browsing them (although visiting your local arcade would be time better spent IMHO)