"As the cellular handset becomes the one device that the world carries, the standalone MP3 player may well be left behind. What's important to many users is having one device that handles mobile music as well as the other functions—phone calls, digital photography, email, Web browsing—now performed by mobile phones," said ABI Research's principal analyst in the study, Alan Varghese.

He continued to say that although portable MP3 players still lead in their memory capabilities, "There is a point of diminishing returns beyond which a user doesn't care whether the device can store 2000 songs or 7500. MP3 player vendors may try to defend themselves by offering even greater disk space, but over time they may still lose market share."

Interestingly, companies such as SanDisk have reported highest flash memory sales in the mobile phone category. SanDisk claims that its miniSD flash memory card is the most popular format for multi-function mobile phones.

ABI Research also noted that mobile operators are already setting up iTunes-like stores for customers with MP3-capable handsets, and that this will increase the tendency for customers to use their mobiles as their primary device for playing and downloading music.

The study showed that mobile handsets with hard drives have been available since 2004. Recent models include the Nokia N91 with 4 GB, and Samsung's SGH-i310 with 8 GB, which was just debuted at CeBit in Hannover.

The study was a part of ABI Research's "Wireless Semiconductors Research Service".