I do believe as technology progresses, smaller sensors will be so good that FF won't matter as much. But we aren't there yet.
I have a somewhat contrary opinion in this regard. I think we're PAST the point where smaller sensors are so good that FF won't matter as much. As you've said, phones are good enough for most. Step away from the masses and consider just the subset of the population that consider themselves photographers (hobbyist and/or pro). Within that subset, I'd bet that 1" sensors are good enough for most. If you narrow it further, m43 is probably good enough for "most of the rest" and so on. I believe that there's only a small percentage whose IQ needs aren't satisfied by anything smaller than FF.
But here's the thing: it's not like film days where medium format was out of reach (in terms of cost and/or convenience) for most photographers. At the convenience end of the scale, the most capable cameras are $1200 for a pocket model and $1700 for the do-it-all RX10 IV. In the m43 line, the top of the line bodies are in the $1700 range. APS-C is the same. Those smaller sensors let you shoot compact kits, but also offer plenty of good glass that's not terribly small and far from inexpensive. You can get FF bodies in the $1000-$2000 range (though if you need the speed & performance that you get from the top of the line crop bodies, you have to spend more on FF). And while top lenses (that fully exploit FF capabilities) are expensive (and get big/heavy for teles) you don't need them to beat the IQ of a smaller sensor.
In other words, the smaller systems may be convenient, but aren't cheap and the biggest system isn't all that expensive or inconvenient. So even if FF sensors don't matter as much, people will buy and use them, just to feel good about capturing and working with high quality images (even if they never print big enough to require it). (And it doesn't hurt that these systems have the broadest lens lineups). Buyers will go to the extremes - 1" cameras will sell well for their ultimate (i.e. fixed lens) convenience and FF cameras will sell well for their IQ and reasonable cost/convenience, while the formats in the middle (which are arguably the best compromises) don't sell as well as maybe they deserve to.
- Dennis
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