tl;dr: sexuality/moe was there back in the arcade era, it wasn’t much of a problem back then, but circumstances changed
I personally care more about gameplay than looks, I remember back in 97, when even Iori was still not well-received by some or many people (cultural shock and/or lack of prior reference, probably), people would even joke about what his surname reads when written backwards; you can then imagine people’s general aversion towards Benimaru. And I thought (back then) that it would be funny to try to learn how to play with him and take advantage of that aversion (didn’t think anything about lack of matchup experience back then).
I think that (regarding sex appeal) there were a lot of ideas that were tested during the arcade era, sex appeal (and/or moe appeal) being one of them (along with eye-candy, cool-looking characters, later, larger combos, for example). People would be more receptive towards “things that catch attention and help sell a game” back then, when these ideas were fresh. Also, due to the popularity of arcades (and lack of competition from PCs/online games back then), people would try the games out of curiosity (and relative lack of fighting games – as time goes, more and more titles get released), people would then crowd at the most played games and there wouldn’t be much room to complain about sex appeal after that (thinking of Darkstalkers when I say this; not only it was “weird” for the time it was released – people would grow to accept it many years later, but then it was “too late”, people would be more focused on the newer and more popular games/series --, there were already some more established franchises). I also think that, due to the much larger game options (not limited to fighting games) of nowadays, it’s much easier for people to “find a reason to drop a game” (so to invest their time somewhere else, where they think they’ll have a higher fun expectation, and at times missing games in which they could’ve had a lot of fun but were afraid of “wasting time finding out”). Assuming that a game isn’t fun because it appeals to a demographic (not limited to sex appeal – even the “standard” of sex appeal varies between cultures and people) is a common mental shortcut, which might lead to judgement mistakes.
Also nowadays, with online play, people tend to treat games in general as MMOs; if their close friends or a large amount of people are playing it, they’re motivated to play (not saying that this is the only motivation, though; people can just not like a game – for example, how it develops – and then drop it); so if enough people choose to not play a game because of sex appeal, the people who play said game also find it harder to keep themselves motivated (especially with the larger number of games compared to the past). I would make a rough guess (because I usually don’t follow mainstream games, not enough time and money for them) that mainstream games also have their share of sex appeal, but they’re in the spotlight, like arcade games used to be, so most people just deal with it and play them anyways.