I claim that for the average and even the more demanding camera user, the current iPhone image quality ist more than sufficient to no longer having to carry a compact camera around. But it's still not good enough for a (semi) pro user to replace a SLR (speed, zoom in, crop/enlarge, extreme wide/tele, flash, noise etc.).
And I think this will stay this way for quite a while.
Again, just speaking about my personal preferences, the current image quality is good enough for 'snapshooting' and a little more than that, and I would be perfectly happy if the next improvements won't be so significant that the camera bumps have to get bigger and bigger all the time.
Instead, I would really appreciate lighter and thinner phones, with smaller camera bumps, as stated before. I also think that this would give manufacturers (Apple?) a boost in attracting more new or converted or upgrading customers. Currently, whenever Apple announces, it feels like 'yeah they tell that the camera got better...as usual...not a lot that excites me' or so. Imagine a phone that's noticeable thinner and lighter than the current ones (while at least preserving the same features/camera qualities)....I'm sure that would create a wow factor for many. And there would be a real differentiator and tangible progress compared to previous versions.
Finally, I'm sure many of you stream the latest scifi movies/shows? Whenver one of the characters uses a phone, how does it look like? EXTREMELY thin! Apparently, this is considered very cool!
Just my 2c