Barbie turned 50 this year, and she is having a mid-life crisis.

On Monday, her creator, Mattel (MAT), reported that fourth-quarter profits fell by almost half --even in a period which included the holiday shopping season -- and its shares dropped more than 15%, to a nearly 10-year low. As for that middle-aged blonde, Barbie’s fourth-quarter worldwide gross sales fell 21%.

Mattel is preparing a global relaunch of Barbie on her fiftieth anniversary, and the makeover is sorely needed. But the question is: Will it be enough? And will it give the impression of a funeral procession ,rather than a celebration?

Mattel, the world’s largest toy company, which also owns the Hot Wheels and Fisher-Price brands, had an upbeat outlook despite a gloomy retail environment before Christmas. One executive even suggested parents would keep buying toys for children by cutting household spending elsewhere. This prediction was like a dart that didn’t even come close to hitting the board. On Monday, Mattel’s CEO admitted the company “wasn’t immune” from the global recession.

As with many industries right now, Mattel and the rest of the toy industry sit at an inflection point. Retailer KB Toys filed for bankruptcy at the end of last year and began liquidating stores immediately. Toys ‘R Us, which was taken private 3 years ago, could soon meet a similar fate. Hasbro (HAS), Mattel’s major rival, is equally under siege. Although the companies both blame the wretched retail environment, there are other forces at play: Both the Internet and digital electronics are seizing market share by the fistful.

These toy companies, especially brick-and-mortar retailers like KB Toys and Toys ‘R Us, can’t match online shopping for scope or scale. And the products toy manufacturers are selling, like Mattel’s hoary old-school brands, have become less appealing to young consumers lusting after digital videos and games. It isn’t enough for a child to mime what the doll says; now the thing must actually talk to you.

My generation required much less stimulation from its toys as children. I was content with Ghostbusters or Teenage Mutant Ninja Turtles plastic action figures. We used our imaginations to stage elaborate plots.

Now, toy companies must diversify their products. As much as Mattel should celebrate Barbie’s anniversary this year -- the doll is indisputably a part of American history -- Mattel might want to ease her into retirement, like an aging Mafia wife. The toy market over which Barbie once reigned no longer exists. Mattel could allow her to retire with dignity. It might be the catalyst the company needs to adapt to consumer demands in this digital age.

As for Barbie, she’ll still have her Dream House, a 2-car garage with a pink convertible parked inside, and Ken -- that ageless hunk of beeefcake -- waiting for her at home.