Rich - re "that you can afford to lose or drop into the water"
I went sea kayaking a couple of summers ago and took my old film SLR just for this reason. It's still a perfectly good camera and takes very good pictures, but I felt that I wouldn't be too upset if I lost or destroyed it.
I didn't give it much thought until reading this blog, but, in addition to the film SLR, I have a camera phone, a low-end point & shoot, a high-end point & shoot and a slightly more than entry-level DSLR. What I find surprising, is that every one of those cameras get a decent amount of use because each one is the best fit for a different setting than the others.
I'm inclined to think that the second scenario you outline is what is happening. It seems to me that point and shoot cameras are rapidly disappearing, and only the ultra low cost ones (that you can afford to lose or drop into the water) or the ones with a decent zoom on them are surviving in the market. Meantime, the high end interchangeable lens SLRs are coming down in price. And it's mostly the lenses that keep the cost as up as it is.
Rich - I totally agree that the higher-end cameras will always have an advantage. The bigger sensor adds a lot to light gathering and overall image quality, as do the larger lenses. Having a big processor that only works the camera, instead of camera, phone, GPS, apps, etc., also leads to better performance.
I can envision two scenerios. In one, as camera phones start eroding the traditional camera market, volumes will go down, manufacturers will have to raise prices, which will further reduce sales. That will end up forcing the interchangeable lense digital SLR (DSLR) prices up into a range that only professionals can afford.
The second possibility is that camera phones will essentially eliminate the point and shoot camera industry. People who would otherwise want a high-end point and shoot will have to move up to a low-end DSLR. That will increase volumes and bring price down.
But regardless, the images coming from camer phones are significanty better than the point and shoot from just a few years ago.
DrQuine - re: "passed the pixel count limit that makes sense"
I have my camera phone pictures automatically uploaded to DropBox whenever I'm on WiFi. That helps to mitigate the issue. I've also had earlier camera phones that would resize the image to make it smaller for email.
The bigger problem that I see with the megapixel race is the sensor pixel size. As they cram more pixels onto such a tiny sensor, low-light capability and dynamic range suffer.
I'd be much happier the keep the resolution at 8 Mp for a while and focus on improving the image quality.
For all their processing power, smartphones will never catch up to the performance of single-purpose devices. This includes cameras. Anything a smartphone can do to imrpove picture quality, a high-end camera can do. And because the high-end camera is starting from a better baseline in terms of sensors and lenses, it will do everything better.
But with the average quality of smartphone cameras continually on the rise, they are meeting the typical needs of more and more people, so not as many have to go to a high-end camera to get what they consider adequate pictures. But the professional photographer will still go for the high end to be able to get the best picture.
I think one of the key breakthroughs was image processing to correct images acquired through cheap lenses. The lenses used to be the real difference between snapshot cameras and professional grade ones. I have to admit that I thought it was a mistake to put cameras on smartphones. I simply underestimated how quickly they would improve and how convenient it would be to fold a camera into a phone.
Many SmartPhone cameras have passed the pixel count limit that makes sense. At 8 MB, many email systems won't allow an image to be transmitted; at 40 MB, virtually none will. So much for "if there's one thing people like to do with their images, it is to share them." I'd predict that auto-focus, image stabiklization, and image processing software will be the key design priorities as well as a larger lens to gather more light and sharpen images under low light conditions.