If i remember correctly it had a lot to do with the quality of the home console games compared to the arcade games. Compare Atari's Pacman with the arcade version. Nintendo came along and their console games were much better compared to their arcade games ie Mario Bros, Donkey Kong, Popeye.
I agree with the quality portion. Console bloat is part of that led to the crash. Someone who was in the game at the time claimed that there were over 100 developers who were pumping out games at an insane pace. He says that maybe 6 of those survived. Quality is still the problem...
look at live service games. Look at Sony's obsession with getting their own successful version of some live service slop. You would think they would learn from Concord straight up failing in less than a month would tell them no one wants it. Gen AI is causing problems too. Its a race to the bottom.