Zapped!

Lef

t 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."

LATEST COVER STORY Mind & Body Happiness Jan. 17, 2004 Past Issues Tsunami Jan. 10, 2004 ----------------- Person of the Year Jan. 3, 2004 ----------------- Secrets of the Nativity Dec. 13, 2004 ----------------- The Stealth Killer Dec. 6, 2004 ----------------- Coolest Inventions Nov. 29, 2004 ----------------- Battle for Fallujah Nov. 22, 2004 ----------------- Four More Years Nov. 15, 2004 ----------------- The Joy Of Sox Nov. 8, 2004 ----------------- The Morning After Nov. 1, 2004 ----------------- The God Gene Oct. 25, 2004 ----------------- The Vote Battle Oct. 18, 2004 ----------------- Visions of Tomorrow Oct. 11, 2004 ----------------- The Tragedy of Sudan Oct. 4, 2004 ----------------- CBS Controversy Sept. 27, 2004 ----------------- America's Border Sept. 20, 2004 ----------------- Struggle Within Islam Sept. 13, 2004 ----------------- World of George Bush Sept. 6, 2004 -----------------   SPECIAL REPORTS  Coolest Video Games 2004  Coolest Inventions  Wireless Society  Cool Tech 2004 PHOTOS AND GRAPHICS  At The Epicenter  Paths to Pleasure  Quotes of the Week  This Week's Gadget  Cartoons of the Week More graphics >> More photos >> MORE STORIES Advisor: Rove Warrior The Bushes: Family Dynasty Klein: Benneton Ad Presidency More Stories >> CNN.com: Latest News

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.).

What really worries manufacturers is wobbly Toys "R" Us. The retailer recently put its toy stores up for sale and plans to focus on its fast-growing and less seasonal Babies "R" Us stores. Buyout firms are circling — quite the comeuppance for a company once feared as the Darth Vader of mom-and-pop toy shops (a helmet now worn by Wal-Mart). Analysts expect dozens if not hundreds of Toys "R" Us stores to close next year — funneling more shoppers to the discounters where they can just as easily pop a Harry Potter DVD in the cart and scrap the toy altogether. To help keep Toys "R" Us afloat, manufacturers are supplying it with more exclusives this year, like a Big Air Ball Tower from K'nex, though Target, for one, is also selling more exclusive toys.