Have you ever seen that old movie When Worlds Collide? It's about the earth getting smashed by a rogue planet called Bellus, and its moon, Zyra. I wonder if the guy who wrote it was dating a girl named Zyra Bellus, and in the interest of “advancing his relationship” with her he named a planet and moon for her. If he did, I hope it worked, because those are pretty stupid names for planets.

As dumb as the names of the planets were, the name of the movie was great. It provided an image of the awesome power that would be released when giant things crash into each other. That's the image that comes to mind when I think of the impact of the merging of traditional toys and virtual worlds.

Virtual worlds take place largely on the Internet, and involve new “worlds” where people can immerse themselves. Through the use of an avatar (a graphical image that represents the user in the virtual world) players can walk, fight, fly, have relationships and do whatever else is possible in a world that is not limited by physical boundaries. World of Warcraft and Second Life are two examples of highly successful virtual worlds in which people pay to play and exchange virtual and, increasingly, real money to buy virtual products. Children's versions are becoming more popular, as exemplified by Disney's purchase of the kid-friendly Club Penguin site for $700 million.

The toy industry has begun embracing virtual worlds in a big way too, and what Ganz's Webkinz began has been followed a host of other toy companies. Irwin Toy's Me2 was one of the most talked about at this year's Toy Fair because its pedometer-like device allows entry into a virtual world where the more exercise a child does in the real world, the more virtual money they earn to buy virtual products on the website. In this case, not only does the virtual world add play value, it makes for healthier kids.

And believe me, there are more toy-related virtual worlds to come. The combination of the traditional and the virtual is not only here to stay but it is going to remake the toy industry. Here's why:

China accounts for 87 percent of the world's toys, and as long as its factories were the low price leaders in manufacturing that wasn't a problem. Now, however, inflation is running hot and sales are going to turn cold unless the industry figures out how to manage price increases. One way to do that is to increase toys' virtual value. By doing so, the consumer will feel they're getting more value while the manufacturer reduces its dependence on labor and raw materials.

When you take a traditional play pattern and add a virtual component, you've made a better product. Why? Because it loses nothing of its traditional value and gains a whole new world of play.

When a child buys a Webkinz stuffed animal he or she doesn't stop hugging and loving it. Rather, they hug it and love it while they play for hours online with a virtual version of that animal. When a girl buys Hidden City's Bella Sara trading cards, she still enjoys the collectable aspect, plus gets the added fun of seeing the horse on the card come to life on-screen.

Considering the industry's steady sales declines over the last five years, we could use a paradigm shift sparked by toys like these.

The toy industry screwed up when it turned its back on the makers of video game consoles. We forced them to start a new industry, and they've been cannibalizing our business ever since. As a consequence, we've been losing market share while they grow exponentially. Toys tied to virtual worlds are changing that balance. The toy industry is beginning to fill the gap between traditional and vitual play by combining those elements; in doing so, it's taking a bold step, because first movers usually win and, believe it or not, the toy industry is the first mover in this phenomenon.

We could, in some cases, see manufacturers use physical, three-dimensional toys as a delivery system for after-market sales. Think about it: Manufacturers could sell the physical toy at cost and make their profit in the aftermarket with subscriptions to more advanced virtual worlds, or sell incremental physical products through a website or at retail.

We could also see the traditional toy industry not only move into that gap between traditional and virtual entertainment, but ultimately take over both industries. This would bring the virtual play industry back into the traditional toy industry fold, and repair the error made over 30 years ago.

So, I think “When Worlds Collide” is the perfect description of what's happening. And in this case, the collision is not only a good thing, it's a great thing.

Richard Gottlieb is president of Richard Gottlieb & Associates, New York, a provider of business development services, and author of the book Ambassador to the Kingdom of Wal-Mart. He can be reached at richard@usatoyexpert.com.