Arena football is there, but it is also different from "regular" football. Example: Live ball on missed field goals, no rushing the place kicker, the net at the end of each goal, MUCH shorter field, etc.
However, I think that if the XFL does better than arena football, it will be because of its increased television exposure and corporate backing of NBC. I've only seen arena football games aired on ESPN and TNN, both of which are cable stations (though this may be because there is no team in the Seattle area). XFL games will be broadcast on NBC, which is available in every major market and doesn't require cable.
One recent example of how television exposure and corporate backing helps is the two women's basketball leagues, the WNBA and ABL. The ABL had arguably much better players but had games aired through local markets and Lifetime (yet another cable channel). On the other hand, the WNBA was backed by the NBA and also had their games aired on NBC. ABL is now dead and WNBA is still alive.