Left unfettered, Anthony Konieczka, 9, would happily thumb away at his Game Boy Advance or PlayStation2 from the minute he gets up to the moment he crawls into bed, 14 bleary-eyed hours later. Anthony's basement in Naperville, Ill., is stocked with traditional toys--board games, puzzles, art supplies--and as far as he's concerned, they're relics of Christmases past. His sister Michaely, 6, still likes dressing her Barbies. "But once she starts playing Game Boy," says their mom Scharmen, "it's hard to get her away."
Play patterns like this could Grinch another Christmas for the toy department. Through September, toy sales were down 5% compared with the first nine months of 2003, according to the NDP Group. Meanwhile, the video-game industry is heading for another record year, with sales of $12 billion in the U.S., up 7% over 2003, including consoles and PC titles. And thanks to hot new games like Halo 2 for the Xbox, the industry is light-years ahead of the toy business when it comes to buzz. With distractions such as instant messaging, cell-phone games and iPods angling for kids' minds and allowances, the digital revolution is making life miserable for the $20 billion toy industry. "Kids are playing on computers at earlier ages; they're picking up Game Boys and PlayStations younger than they were five years ago," says analyst Anthony Gikas of Piper Jaffray. "These are good, sexy products. They're cannibalizing the traditional toy market."
While some hard-to-find toys emerge every holiday season, toymakers are heading into this one without a monster hit. Indeed, there has not been a Furby-style frenzy in years. Of 10 toy segments--yes folks, there are that many to the people who take toys seriously--only two, arts and crafts, and dolls, have generated sales growth over a recent 12-month period, according to investment firm Harris Nesbitt. Some of the weakest categories like construction sets (down 10%) and action figures (down 9%) are the ones aimed at boys, who suffer the most blisters from video games. Analysts expect one of the top stocking stuffers this season to be not a traditional toy but the new generation of Nintendo's Game Boy, the DS, which hit stores last week. Next year will bring more competition in handheld gaming, when Sony launches the PSP. Cell-phone makers like Nokia are also targeting kids with game gadgets. A recent Roper poll found that parents plan to curtail toy purchases this season in favor of gifts such as video games and consumer electronics.
But a runaway smash alone would not solve the woes of the toy business. Toy stores see little Christmas cheer in tackling the big-box discounters Target and Wal-Mart, and many are shutting down. Since last season's brutal price war--led by Wal-Mart--KB Toys and FAO Schwarz have closed roughly 600 stores between them. Toys are increasingly merchandised as impulse items at drugstores, supermarkets and even coffee shops. Starbucks has sold loads of the Cranium board game. KB, operating under bankruptcy protection, says it will close 164 of its remaining 820 stores in January. FAO now consists of just two stores and a luxury catalog hawking, uh, toys like a tyke-size Mercedes convertible--a bargain at $15,000 (top speed: 15 m.p.h.).