By the late 1990s, the adventure game genre was in decline. Some credit this to Sierra's increasingly difficult games, which, by this point, nearly required a walkthrough to play. Lucasfilm games were still impossible to lose, but Lucasfilm had followed in Sierra's footsteps with puzzle difficulty, making them quite much harder to win. In 1990, Lucasfilm became part of LucasArts Entertainment Company, and in 1993 LucasArts became the name of the game division.

Grim Fandango was released in 1998 and received many awards including GameSpot's Game of the Year as well as extremely positive reviews. Despite this, sales were quite low and it was a commercial failure, the first LucasArts game that did not make a profit. In the aftermath, both LucasArts and Sierra canceled games in development, citing a change in the market.

The classic adventure game genre stagnated after Grim Fandango. The previously-rapid release of new games became a slow trickle, with only a small handful of notable games released between 1999 and 2006. Despite the industry-wide slump, niche franchises survived. Her Interactive's Nancy Drew series, which began with the 1988 release of Secrets Can Kill, continued into its second decade of steady releases.

The enduring popularity of the earlier classic adventure games received an oblique compliment when Homestar Runner, an animated Internet cartoon, released a text adventure parody, Thy Dungeonman, in 2004, followed by Peasant's Quest, a parody of Sierra's Quest titles. Peasant's Quest used a system closely modeled on Sierra's Adventure Game Interpreter, which was used to write the Quest games.