When I was a child, there was nothing I wanted more than toys. Stuffed animals, He-Man figures, toy cars, and Legos -- I loved them all. Those days are gone, or perhaps, changed. For the last few years, toy sales have been on a slow decline, sinking from annual U.S. sales of $23 billion to just over $21 billion in 2011. 2012 wasn't any better, and traditional toy manufacturers are starting to feel the sting.

Mattel (NASDAQ:MAT) announced falling sales of girls' toys, and just yesterday, Hasbro (NASDAQ:HAS) announced weakness in its boys' toy lines. The difference has to be made up somewhere -- there are still kids and kids still like stuff -- so where is all the money going?

Kids these days
The obvious answer is that kids are staring at their device of choice these days. LeapFrog (NYSE:LF.DL), the maker of children's handheld educational games, increased its 2012 sales by 28%, rising over $500 million. The problem with jumping to LeapFrog as a solution, however, is that the business is included in most overall toy sales results.

Research group NPD includes "youth electronics" as one of its toy categories -- though based on the numbers alone, LeapFrog makes up most of the subtotal. The clear division arises only when you start to look at video games. Hasbro recently entered a multiyear agreement with Electronic Arts (NASDAQ:EA), giving the game maker exclusive rights to games like Monopoly and Clue. The tie-in isn't new, but it does assure EA of a product line to help it combat newer game developers.

As traditional toys stagnate, traditional video games are starting to feel the pinch, too. EA and others have been feeling the sales pinch, with newly announced declines in video games sales coming in June, according to NPD. So the question remains: Where is the money going?

The hidden life of online sales
Hiding behind the drop in board games, the fall in dolls, and the slow decline in video games is the specter of online video game sales. NPD only estimates sales, but some of the biggest purveyors of online games -- companies like Steam and Apple -- don't report their game sales figures in any detail. NPD recently announced that it will be tracking digital sales by the end of the year, but until that time, digital sales represent the black box of toy sales.

The move by Hasbro isn't just an attempt to keep up with the times -- it's an attempt to buy into the future. Mattel has been slow to get on the bandwagon, although it made early attempts at video game success with its own short-lived Intellivision system in the late '70s.

For now, toy makers' futures seem weak, but not desperate. There is always going to be room in the retail world for actual toys, but the share of cash given over to those toys is likely going to continue falling. Hasbro seems best poised to take advantage of the shifting sands, but in the end, it may be game developers and digital retailers that benefit the most.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.