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The Digital Skeptic: Moms Have an Ugly Toy Story for Ken and Barbie

Tickers in this article: AMZN HAS LF MAT
Additional reporting by Alex Dalenberg

NEW YORK ( TheStreet) -- Heather O'Neil, Pat Graves and Tracy Vaninger are three moms with one scary bedtime story to tell big toy companies.

"The DIY trend kind of helped us," O'Neil told my assistant Alex a few months back. O'Neil is the owner of Happy Doodles , a Needham, Mass.-based on-demand stuffed toy company. "It got people thinking in terms of custom things not having to cost millions of dollars."

This mother and entrepreneur, who has absolutely zero engineering or manufacturing background, has reinvented herself as a high-tech toy innovator. By cleverly kludging together off-the-shelf digital design and fabrication systems, O'Neil is becoming a next-gen child's toymaker.

With toys starting at $25, she does something giants including Mattel (MAT) , Hasbro (HAS) and LeapFrog (LF) tend not to: make a reasonable dollar turning your child's doodles into a ridiculously cute, fully stuffed, plush toy.

And she is just one of many successful high-tech toy elves. Though the three did not disclose sales, all said business was steadily growing.

"It's definitely an Internet thing," says Graves, who runs Omaha, Neb.-based My Own Cuddly , one of many just such on-demand, small-fab toymakers Alex and I found. "It's all just done out of a room in my house."

It might be easy to dismiss "moms with CAD" as no threat to star kids' brands such as Barbie, Hot Wheels or Star Wars. But in these digital times, that would be like dismissing blogging as no threat to newspapers. It turns out that these innovators sit on a leading edge of a shift in the toy, kids and youth media market -- away from established companies.

"I'm a businesswoman, so whenever I see something my mind always goes to, 'How can we develop a business around that?'" said Vaninger, yet another owner/mom who presides at on-demand plush doll fab shop Sunny Little Studio in St. Louis.

Which means, friends, just as toy giants report optimistic performance and gather for their yearly Toy Fair confab, the toy business is beginning to slog through the same value-crushing digital disruption suffered by publishing, music and financial services.

An ugly toy story
For starters, research is confirming what any parent will tell you: Kids are living in a strange new digital content age where established brands are less important.

"American families see tablets as playmate, teacher and baby sitter," said a 2012 report from New York-based Nielsen. And this portable kids portal is essentially defined by the gobs of cheap content cash-strapped Internet companies are pouring into it.

In late 2012, Amazon (AMZN) rolled out the Kindle FreeTime Unlimited, an all-you-can-eat kids tablet content buffet of mainline brands such as Sesame Street, Reading Rainbow, Nickelodeon and dozens more. All starting at just $3 a month -- a fraction of what cable or satellite TV charges for the same stuff.