At least in my area, Chuck E Cheese is experiencing stiff competition from places like ClimbZone, a kid-oriented climbing gym and ropes course, and Altitude, a trampoline park for kids. They all have the arcade, albeit in somewhat scaled back form. Their food offerings are vestigial.

I've been to kids' birthday parties at all of these. Chuck E Cheese is the only one that doesn't have our kids asking to go back again on the ride home. They have a good time while they're there, but they don't perceive much "replay value".

In light of that, this seems like a good move on Chuck E Cheese's part. They arguably can't completely get rid of the show component for brand identity reasons, but converting it to screens probably reduces their cost structure enormously. And it could free up some floor space, which would let them shift the focus toward physical play. That is something that has a lot more novelty value for kids nowadays than it did when I was growing up. I think probably because the availability situation has flip-flopped: they live in an ocean of high quality passive entertainment, but opportunities to jump and run with a crowd of other kids are becoming increasingly hard to come by.

I still suspect it's too little too late though? Chuck E Cheese locations are physically too small to accommodate a really good indoor play space. They're typically in strip mall locations that don't offer the kind of floor and overhead space needed to install indoor play equipment that's up to modern standards for novelty.