I don't really have much to say about the declining popularity of children's picture books other than this: my mom used to buy me clothes that were three sizes too big so that I could wear them for a while. When I buy books for kids, I generally go at least one level up so that they'll be able to grow into them. I don't really want to pay good money for a Dick and Jane book that the kid's going to outgrow in a week, anyway. In addition, I was reading chapter books by the time I was in first grade, so I don't really see a problem with it.
On the other hand, picture books can be freaking awesome.
Either way, parents will be accused of ruining their childrens' lives, so it's kind of a lose/lose.