People wonder where video game arcades went after the console market started to really gain traction in the early to mid 1990s (and really got rolling with the Playstation 2). Outside of Japan, they largely went away, but now they're back: on your mobile device.
We've gone right back to feeding tokens (in-game credits) because now you can distribute the equivalent of an single-game arcade cabinet -- a game that is designed to optimally take in cash at a given rate -- to every mobile device. A good analogue would be to make a beat-em up arcade cabinet that let you start out for nothing, but when you inevitably get KO'd, you have to feed it a few tokens for the privilege of continuing before the 15 second countdown elapses and you have to start from the beginning.
Slot machines are a much better analogy imo. Mindlessly pulling/tapping and getting rewarded at steady intervals. You continue to shove in your money so you can continue to get rewards.
Arcade games on the other hand were still fun and challenging even if you took away the psychology behind stuffing in quarters. (no one has console slot machines)
I can think of a couple arcade examples analogous to the "in-game currency" variety of IAP. In Gauntlet, inserting coins adds to the player's health, which constantly ticks down. In Lunar Lander, inserting coins buys fuel, which is needed to maneuver.
By the time arcade games were sophisticated enough to have things like multiple weapons and super moves, developers had settled on the model where extra coins are used to buy the ability to continue a game after failing. The arcade industry is quite conservative overall.
I think that's different. In arcade's example, the only reason you needed a coin is when you have used all your lives. Now, if you had better skills, you could get through the entire game without a single additional coin.
In IAP module, the game is designed so there is no chance (at least for 99% players) to go through the game without purchasing the stuff on the go. Take "where is my water" for example. You can continue game as long as you keep scoring all 3 coins on each level. If you miss even one coin, after many levels you will be missing that coin to open another level. There you have an option to open the level for $$$ Now, some of those coins, in my gaming experience, were impossible to score, but that's a different story...
Some modern shoot-em-ups in the arcade have blatantly unfair portions of the game where you WILL get hit and lose a life. See CarnEvil for an example. I would consider these similar to IAP.
Older arcade games like Galaga and Super Mario Brothers, however, give you a fair opportunity to avoid the "Insert Coin to Continue" screen based on your skill. I can last 20-30 minutes on a single quarter easily for both of those games.
They didn't, but the idea behind arcade cabinets is that without continuing to feed in money you got an incomplete experience.
The issues you're bringing up -- and is valid -- is a fair number of free to play games may instead give you a sub-par experience (unless you pay money, you have to wait) unless you feed in money.
We've gone right back to feeding tokens (in-game credits) because now you can distribute the equivalent of an single-game arcade cabinet -- a game that is designed to optimally take in cash at a given rate -- to every mobile device. A good analogue would be to make a beat-em up arcade cabinet that let you start out for nothing, but when you inevitably get KO'd, you have to feed it a few tokens for the privilege of continuing before the 15 second countdown elapses and you have to start from the beginning.