Yes, that's true, but when camera phones will be as good as e.g. Canon 5D Mark iii (and they will, relatively soon even) then that quality will be good enough for practically everyone. At that point only professionals need better quality.
Will smartphones be able to include much larger sensors in the future?
Is there some new physics that obviates the need for a large sensor?
The 5D Mark III has > 24x the sensor area of an iPhone 5, and most smartphones are even worse off [0] [1]
[0] http://en.wikipedia.org/wiki/List_of_large_sensor_interchang... [1] http://www.chipworks.com/blog/recentteardowns/2012/09/21/app...
Even though larger sensors will be beneficial, at some point the small sensor will be good enoug for 99% of consumers, though professionals will still prefer the larger sensor.
>Will smartphones be able to include much larger sensors in the future?
Perhaps, like Nokia pureview did - however that phone is slightly larger than the average smartphone.
>Is there some new physics that obviates the need for a large sensor?
No, but technology will advance so that small sensors will be sufficiently good to 99% of consumers. There's progress in sensor technology ever year. There's also progress on the processor side, which has been/is apparently a bottleneck, as new processors in DSLR cameras enable better image quality (take for example DIGIC processors).
I love me my iPhone 5 but unless you want a phone the size of a 1980s one, there are physical limitations. Try photographing a soccer play from the sideline or getting a shallow depth of field with a phone, things you pay thousands for a full frame SLR for.
Now, as good as a good point and shoot soon? And better because its Always in your pocket and connected? I'll buy that.
It's true that DSLR cameras have many advantages compared to smart phones, but I was talking about image quality. Professionals and hobbyists will buy the DSLR instead of shooting with a camera phone, but this doesn't apply to your average consumer.
I have a 5D Mark III and there is a huge difference in quality with my iPhone 5. I can put on a f1.2 lens on the 5D and get amazing autofocus accuracy with a depth of field (DOF) of millimeters in low light and get an amazing shot at ISO 10,000. The phone is impressive for what it is but the autofocus doesn't have to do much because the DOF is so big. If you have a bigger sensor and more megapixels you need a good quality lens and good autofocus.
On the other hand GoPro have a pretty good quality output where big DOF is a good thing and they focus on high frame rate video for action. I would love if my phone had better image stabilization (e.g. Luma app) and went up to 120fps at full HD. That would be achievable soon.