They create smartphone games for little kids. Twenty-first century pacifiers? Apparently the kids love them!
What I'm thinking of, though, is a dedicated device. You don't need a smart phone for kids games; all you need is some audio/graphics and whatever it is that runs Java ME in these things. Given the price of cheap Nokias, it should be doable for less than $100, especially since you don't even need the actual phone machinery.
A large part of the reason for a dedicated device is that most kids are not going to accidentally make calls, they're going to accidentally drop your expensive phone or something else that will physically damage it. A 'toy phone' could be made a bit more resilient...
It's designed to connect to Wifi and do IM and SMS, not a whole lot else ... but for a lot of kids I suspect that's a large portion of what they want. From a parent's perspective it frees up the computer and avoids having to get Junior a cellphone (and its requisite monthly plan fee) for a while longer.
Apparently ZipIt charges $30/year for the SMS and IM functionality after the first year, which makes me wonder if they're selling the hardware unprofitably, believing that they'll get subscription fees down the road. (That strikes me as a poor business model, since I doubt most of the devices will resubscribe for a second year -- 12 months is a long lifetime for a $50 device aimed at kids that's most likely a stopgap on the way to their own laptop. But I assume they've planned for that.)
I'd guess we're going to see a lot more in that space in the near future; the PC and laptop markets are getting pretty saturated, but I think netbooks have really just started to tap into the ultraportable demand, and kids could be a big consumer.
http://www.apple.com/ipodtouch
$200 for 8GB, I believe $150 refurbished.
For example, someone built what is essentially an ipod for kids, but based inside a teddy bear
Music devices inside stuffed animals isn't new. I (still) have a stuffed frog toy somewhere in my shed that contains a radio in its chest I received as an infant 27 years ago.
I suspect if you could build interactive applications embedded within a toy, you'd have a winner, especially if a parent could expand the applications on it.
Could you imagine an interactive teddy with its own app store powered by something like fisher price or hasbro?
e.g. Click on the picture of dad and hear him snore... etc.