Sales of MP3 players, including the iPod, fell by more than a fifth in 2012, earning £381 million compared to £491 million in 2011.
Research company Mintel believes that the MP3 player will be worth just £25 million in the UK by 2017, reports The Daily Telegraph.
The decline of the MP3 player is attributed to the rise of multi-functioning smartphones such as Apple's iPhone and the Samsung Galaxy S3.
"It is impossible to talk about the current PMP market without extensive reference to smartphones. The devices have directly contributed to the sharp decline in the value of PMP sales," explained Mintel's Samuel Gee.
With smartphones becoming increasingly affordable, the Mintel analyst claimed that it is a trend "unlikely to reverse".
IHS analyst Ian Fogg, meanwhile, said that smartphones are more convenient and offer more musical choice.
"The convenience of a smartphone is greater than an MP3 player because it is always with someone," said Fogg.
"It also provides more choice of mobile music because someone can play back their own music - as they can on a MP3 player - but they can also access other music services like Last FM or Spotify. Therefore there is a greater choice of music available."
It is believed that there will be more than two billion smartphones in use by 2015, double the current amount.
Apple unveiled its seventh generation iPod Nano in September.
Available in seven colours - grey, black, red, purple, yellow, blue and green - Apple's compact media player features a home button and the new Lightning connector found on the iPhone 5.
The seventh generation iPod Nano sports a multi-touch display, integrated FM tuner, widescreen video and pedometer with Nike+ tech on board. Bluetooth support for music streaming and enhanced battery life for 30 hours playback is also included.