How much is the iPod line faltering – – or how well is the rest of Apple’s line doing in comparison?  It turns out that after GAAP accounting is taken out of the equation, the iPod line, which once was Apple’s profit leader is now #3 in profitability, beating only Apple’s AppleTV line.

As this graphic shows, iPod sales have been contributing a shrinking amount of revenue to Apple’s general performance, skip past the break to see another graph which shows us in clearer terms the shrinkage of iPod revenues.

These attractive stats come from Philip Elmer-DeWitt over at Fortune. He notes that as recently as 2006, iPod sales accounted for 55.5 per cent of Apple revenue. Now that’s shrunk to under 18 per cent.

He cites day trader, Andy Zaky, who says, “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.”

Zaky points out that this is happening as MP3 players head toward becoming commodity items.

(That point at which everyone has one, and brand and features become much of a muchness…incidentally, we think that’s what Microsoft’s betting on with its Zune. We think Microsoft just hopes to sell more Zunes to a market which doesn’t care about features or brand any more. Kind of like a supermarket own brand. We also think Apple has its own low-cost MP3 player plan for that point of market development).

Right now, these shrinking iPod sales don’t matter so much, as Zaky notes, “Apple is still firing on all cylinders thanks to the explosive growth of the iPhone.”

Apple management have been planning to manage the market change, Apple admitted in July. Chief financial officer Peter Oppenheimer said, “We expect our traditional MP3 players to decline over time as we cannibalize ourselves with the iPod touch and the iPhone.”

Notions that Apple’s developing its next brood of iPods are reinforced by the company’s recent half-billion dollar deal with Toshiba for the supply of flash memory chips, as used in iPhones, most iPods and many of its laptops. The deal means Apple’s secured “about one quarter’s worth” of flash memory for use in future products.

Rumours that Apple will add video cameras and other potential new features (WiFi?) to future generations of iPod nano and iPod touch also remain. If true, these moves will be proof positive that Apple is extending the versatility of these devices in order to extend the reach of its market.

Pacific Crest analyst, Andy Hargreaves, recently notes, “iPhone‘s superior mobile internet experience and the ability to create valuable custom applications will continue to drive gains.”

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