iPod chip supplier PortalPlayer announced on Thursday that Apple will not be using its chips in some upcoming iPod models. The announcement came as a surprise to analysts and investors, especially since estimates peg about 70 percent of the company's revenue comes from supplying iPod chips.

PortalPlayer's system-on-a-chip processors have been the heart of the iPod, enabling it to quickly and efficiently transfer music from your computer for listening on the go.

Gary Johnson, PortalPlayer's Chief Executive Officer, commented "We were clearly surprised with the change. We are shipping in today's video iPod's, (but) the visibility for us has become more clouded."

For now, it appears that the PortalPlayer chips won't be used in mid-range and high-end Flash memory-based iPods like the nano, but that they will continue to be used in other models.

Analysts are calling Apple's move a disaster for PortalPlayer. According to Reuters, Stanford Group is cutting its target value from US$33 to $14, and changing its rating from "Buy" to "Sell."

Jeffries & Co. analyst Adam Benjamin said "We cannot overstate enough how disastrous this announcement is to PortalPlayer's fundamentals as well as the stock price."

The news has already had a major impact on PortalPlayer's stock value. It dropped from $33 to as low as $12.57 at one point today. Overall, it has hovered around 40 percent lower than its opening price. Currently, it is trading at $13.18, down 41.66 percent.

Mr. Johnson says there is always a risk of customers changing product designs, eliminating suppliers in the process. And he isn't letting Apple hold his company back either. Design teams, he says, are already working on other new products.