Is iPhone replacing iPod?

The iPod accounted for 55.5% of Apple's revenue in 2006, but by last quarter its share had shrunk to less than 18%.

This is a good thing, according to Andy Zaky, a day trader and occasional blogger whose estimates of Apple's earnings regularly beat - by a long shot - the estimates published by professional analysts.

"Many Apple critics have argued that Apple would essentially fall off the earth because at some point in time the iPod's growth would collapse," says Zaky. "The second part is true. The iPod growth rate has in fact fallen off a cliff as Apple posted its first yearly drop in iPod sales ever in Q3."

"However," he adds, "Apple is still firing on all cylinders thanks to the explosive growth of the iPhone."

DeWitt said Apple's business model is "as a three-legged stool: Mac, iPod, iPhone", as Steve Jobs often does.

The change in heights of the three legs, according to Jason Hinder, the editor in chief of TechRepublic, is partly due to the iPhone cannibalizing some of the iPod's sales and partly due to the successful iPhone 3GS launch last quarter.

Hinder said while iPod revenue is definitely losing some steam, the bigger story is the strong iPhone revenue growth and the steady strength of Mac sales (despite the fact that Mac sales have leveled off in recent quarters because of greater price-consciousness from consumers due to the global recession).

The iPod will likely see stronger sales in the next two quarters because of the back-to-school and holiday seasons, according to Hinder, while iPhone sales will likely cool off following it's big launch in June.

The handset market is significantly larger than that of the MP3 market, according to Zaky.

While not everyone who is in the market for an iPhone is in the market for an MP3 player, iPhone purchasers who are in both markets have little need to own both an iPod and an iPhone, Zaky said in a report.

"One who decides to buy an iPhone over an iPod touch is essentially buying an iPod." Zaky said.

The iPhone will potentially become Apple's permanent No. 2 revenue stream in 2010, Hinder said.