Stage 1: The industry reacts with disdain – “The new digital stuff is just a fad. Look – our sales are going great. And people love us. They’ve always loved us. They’ll be back in droves when this digital stuff blows over. It’s so cheap and shoddy – where’s the fun and interest in that?”
Stage 2: The industry’s P&L statements can no longer be ignored. The industry reacts by trying to co-opt the new digital technology into its existing product.
2a. The existing designers and producers react with outrage and strong resistance to changing the way that they’ve done business for decades.
2b. The industry half-heartedly markets the new hybrid product to its existing customers. The distributors don’t really understand the appeal of the new digital technology, but they glom onto the idea that the hybrid is the “same thing only different” and try to force the digital product into their same old channels and strategies.
Stage 3: The old guard loyalist customers are turned off by the hybrid product that doesn’t function as well as the “pure” version, and inundates the industry with complaints and threats.
3a. The newer customers, who don’t have that much loyalty, and who use both regular and digital products, try the new hybrid and find that the experience isn’t really all that satisfying. It doesn’t do the old thing well, and it doesn’t do the new thing well. So they split their time between the new digital and old analog, trending gradually towards the new.
3b. The newest customers, who have been using digital, look at the hybrid and sneer. They don’t bother using something that is so obviously lame and half-hearted.
Stage 4: The industry is relegated to a curiosity, maintained only in small niches, and used by nostalgic aficionados.
The story of newspapers? Or of pinball machines? I know, I know – the analogy breaks down at a million kajillion places along the way, but there are some interesting points of reference.
Full disclosure: I was a pinball nerd back in the day. After every big mid-term test, I’d go to the student union, and take out my frustrations and anxieties by banging around Pinbot, Black Knight, Eight Ball, Centaur and others. Sure, there were other video games there, and every once in a while, I’d goof off with one of them to pass the time. But there was something therapeutic about the way that you could actually get physical and bang on a pinball machine to get results – either to get the damn shiny sphere to go down the right ramp, or to get a revenge “Tilt” when the damn thing kept draining on you… 
I remember the machines that started appearing that tried to include video games into the back panel. You’d make a shot, and then a short cut scene would come up and you’d have to take your hands off the flippers and yank on the controls for a bit.
The game sucked. The pinball game was shoddy and ugly and didn’t really play well. The video game was light-years behind the competition that was specifically designed to be a video game. Worse, it cost far more than either one, and the damn thing was always either out of order, or the arcade owners had its guts all over the floor and were wrenching on it.
In later years, the pinball industry was relegated to producing super-expensive movie tie-in games for Terminator, Lethal Weapon, Addams Family, etc. etc. Meanwhile, the video game industry migrated from the arcades to the game consoles in every living room. The technology kept improving from the simple move-and-shoot games like Asteroids and Space Invaders to the current MMPORPGs like World of Warcraft, City of Heroes, Guild Wars and all the first-person shooters like Halo 3, Resistance: Fall of Man, and whatever iteration of Doom/Quake we’re now up to…
Not only have video games far outstripped the wildest dreams of the old arcade makers (who could have ever predicted one-day sales in the hundreds of millions of dollars), but the industry has also spun off all kinds of related industries: cheat codes, bulletin boards, wikipedias, blogs, fansites, contests for best fan art, etc.
The lessons for newspapers here are not clear-cut. But I’d like to believe that it is possible for a whole new thriving economic ecosystem to arise when a new technology invades an existing content space. I’ve spent the last couple of years staring into the crystal ball, trying to discern hints of what the future info-media-news landscape is going to look like … all of which may be as futile and doomed to error as it would have been for a Bally or Williams pinball game designer back in 1983 to have predicted that someday, a teenager in a basement could play a 3-D immersive game with other kids from all over the world, and then run his own business connected to said game…