Olympus will have to go with a bigger sensor

Why do they need a bigger camera to be profitable? I would imagine that the lower end cameras sell many more units and end up making more overall money. For example, I bet Canon has sold 10x more 400d than 40d and 100x more than 1ds. The high end market is not really THAT big. I don't know if it is worth fighting that hard to compete with the A900 or the 5dmk11 to sell to the relatively few enthusiasts with deep enough pockets. Plus, it would require a whole new set of glass. I think they can tweak more out of the 4/3 sensor with the right tech. Maybe they need a new sensor maker, but they can do it. They've already almost doubled the MP on it over the past few years and it has better noise performance. lets do it again.
 
35mmFF looks silly against MF. Yet most people aspire no further than 35mmFF. Now why is that? Could it be because cameras get less practical as the sensor gets larger?

Personally I feel with with current technology at the 10-12MP point that 4/3rds produces an image quality JUST as good as 35mmFF, unless you are either going to ramp up the ISO, or push and pull shadows heavily in PP (I do the latter of course, which is why I have a 35mmFF camera, but most people don't and will gain nothing from such a camera).

However, this is about to change, now that 20MP+ 35mmFF is available at sensible cost. The E3 produces images that are every bit as high quality as the Canon 5D (oh yes it does, sorry, I regard your criteria as nuts). But can it produce images as good as the Canon 5D mkII's? Well, if it can, then Canon have screwed up, and soon someone will come along and not do so.

One has to accept that Oly is a smaller, more practical solution (as a system, not as one camera), that gives away something in noise and res to 35mmFF.

If Oly built a 35mmFF camera now it would have no advantages over the D700 and I don't see why anyone would buy it.

As for APS-C, that's a messy, nasty format that offers few advantages over 4/3rds but lets you into a wide range of rubbish lenses. The future is 35mmFF and either 4/3rds or MFT.
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