As Apple’s 9-month old App Store redefines the smartphone industry and is now spawning copycats, actual app sales are approaching a frequency that could see the digital store become a billion-dollar business before year’s end. It’s a very reachable goal, according to research.

In a report on quarterly smartphone market trends released recently, Needham & Co. analyst Charlie Wolf noted that the number of applications on the App Store recently surpassed 25,000, with actual downloads exceeding 500 million.

“The iPhone App Store has redefined the smartphone industry,” he said. “In a game of ‘follow the leader,’ most operating system platforms, including Android, Windows Mobile, Palm and Symbian, announced they were opening similar online stores.”

Attempting to quantify actual dollars generated from app sales (which Apple doesn’t report specifically), the analyst backed his way out of a reported $303 million increase in the company’s ‘music-related sales’ for December quarter, which includes sales from the App Store/iTunes Store. Assuming iTunes sales were flat year-over-year but iPod accessory sales grew in line with the players themselves, he subtracted $100 million to arrive at an App Store sales estimate of $203 million for the three-month period ending December.

Crunching the numbers, that makes the App Store an $800 million business, and assuming downloads (and sales) increase, that could make the shop a $1 billion dollar enterprise by years’ end.