Sales of iPods are expected to continue to recede, with July’s unit sales down by 17% over the previous year.

The typical back to school bundling promotion Apple runs, offering free iPods with new Macs, should boost iPod sales over the end of the quarter, bringing quarterly sales to just 5% to 14% less than last year.

Sales of iPods began to plateau last year, with only slight growth over 2007. This year, sales of iPods have actually slipped slightly, with summer quarter sales falling from 11 million in 2008 to 10.2 million this year.

Apple executives have acknowledged that they see the market for traditional MP3 players continuing to level off, and have made efforts to replace those sales with iPhone and iPod touch models. During the same summer quarter, for example, iPhone sales jumped from 717 thousand to 5.2 million, resulting in a large net gain of combined iPod and iPhone sales overall, from 11.7 million in 2008 to 15.4 million this year.

Rapid growth of the iPhone overseas is also contributing to this “sales cannibalism,” which results in allowing Apple to migrate MP3 users to its iPhone software platform and gives the company even more opportunity to sell Macs and its related services such as MobileMe.

Strong international growth in the iPhone was highlighted recently by the report that the iPhone 3GS was the top rated phone in Japan for the month of July, erasing any remaining worries that the Japanese market might “hate” the iPhone.