Depends on how techy of an answer you want. The simplest answer, and an extremely incomplete and superficial one, is that the sensors are much smaller. Packing a bunch of pixels onto a small chip is going to require sacrifices. The small, cheap, fixed-focus, plastic lenses don't help either.

To delve deeper, you have smaller apertures; hence, less light actually hitting the sensor (the amount of photons hitting the sensor is entirely dependent on the aperture size, less transmission losses). This is a physical constraint, one that will always limit small cameras, even the ever evolving point-and-shoot. Remember that f-stop is a ratio, so to use a larger aperture will require a larger focal length, and thus a larger camera. If you want a razor thin phone with a camera you're going to have to use a pinhole for an aperture. I'll spare you talk of difficulties with diffraction and whatnot. You'll notice that despite increases in technology in the last 100 years that "35mm" cameras haven't really changed size very much. Full-frame dSLRs are bigger than 1.6x sensor cameras for a reason.

This could spawn a lengthy discussion, but (I think) that's a decent look at some of the factors involved. There's a ton of good info on this on the web, but get ready to jump down the rabbit hole if you're the inquisitive type. Some basic sensor size stuff here:

http://www.cambridgeincolour.com/tutorials/digital-camera-sensor-size.htm

And this is more about sensor quality, but the stuff about Full Well Capacity and how this affects the signal-to-noise ratio is interesting:

http://www.clarkvision.com/articles/digital.sensor.performance.summary/

And a ton of techy discourse here:

http://www.clarkvision.com/articles/index.html#part_2

I guess I should add, before I get lynched, that good photos can be taken with simple cameras, they're just a lot less flexible on conditions and you need to understand the limitations and freedoms of such cameras. You might find this interesting:

http://www.flickr.com/groups/73532194@N00/pool/

StroNoob, thanks for your excellent answer.

From the Clarkvision website I found this summary or info:
http://www.clarkvision.com/articles/how_many_megapixels/index.html

What is the importance of megapixels?

All other things being equal, megapixels indicate how much detail an image will have. In general more megapixels in an image will mean a larger sharp print can be made from the image. But all pixels are not the same, and as the megapixels go up, other issues, like lens quality become more important, and in some cases more limiting.

Are megapixels overrated or does it really help to keep adding them on?

The most important thing about an image is the subject, its composition and lighting. How many megapixels and image has is secondary to overall impact. Having said that, image sharpness is usually directly connected to impact. The human eye has incredible resolution, so our typical view of any scene in real life is really amazing compared to a typical photograph. So how many pixels you need depends on what you want to do with a photograph. If you only want to make prints up to 8x10 inches, you only need enough pixels to make a sharp print at that size. The general rule for high quality sharp prints is 300 pixels per inch. So an 8x10 inch print needs 8x300x10x300 = 7.2 megapixels. One can still make very nice 8x10 inch prints with less megapixels, but the lower the megapixel count, the softer the image. On the other hand if you want a 4 foot by 5 foot print that appears sharp, even when closely examined, you need over 250 megapixels (4x12x300x5x12x300).

**** MP vs Noise ****
Another important, but often less obvious, property of digital images is noise. Manufacturers do not give a noise specification for their cameras, so buyers must rely on reviews. Noise in modern digital cameras is largely determined by how many photons (how much light) each pixel can collect. An analogy is collecting rain drops with a bucket in a rain storm. You collect more rain drops with a larger bucket. It is the same with pixels: larger pixels collect more photons and thus produce images with less noise. So cameras with larger pixels can produce nicer looking images than cameras with more but smaller pixels. The top end digital cameras have high megapixel counts and large pixels. Such cameras cost more because the imaging devices cost more to produce.

How many megapixels do you really need?

It depends on how large a sharp print one wants to make. For sharp prints use the formula: print width x 300 x print length x 300. You can relax the quality by changing the 300 value to 240. Much below 240 and the perceived print quality drops rapidly. Megapixel needs are shown in the table:

Number of megapixels for given print quality
Print size
(inches) 300 pixels/inch 240 pixels/inch
4 x 6 2.2 1.4
5 x 7 3.2 2.0
8 x10 7.2 4.6
11 x14 13.9 8.9
16 x20 28.8 18.4


If you want to be able to crop pictures before printing a certain size, then you need more megapixels.

If you learn image processing tools, like Photoshop, you can interpolate between pixels adding more pixels to the image. You can sharpen the image and make larger prints than in the above table. For example, one of my bird photographs that placed in an international photo contest was a 3-megapixel image from which I made 16x18-inch prints. But it took several hours of image interpolation and sharpening to be able to print that large.

For "knock you socks off, jaw dropping" sharp prints, raise the pixels count to 600 pixels per inch. The megapixel count goes up by a factor of 4 compared the the above table under the 300 pixels/inch column. That is beyond what most consumers need. One needs large format film cameras for large prints.


What is the maximum number of Megapixels needed for consumer use?

How many megapixels the average consumer needs depends on the print size and quality one wants. The above table gives a good indicator. Cameras in the 5 to 7 megapixel range make nice 8x10-inch prints. In choosing a camera in this range, all other thing being equal, I would probably choose a 5 megapixel camera over a 7 if the 5 megapixel camera's pixels were significantly larger.

You can find pixel size on some review sites, like http://www.dpreview.com, or the size of the sensor and number of pixels to derive the pixel size or spacing. For example, a 5 megapixel camera may have 2592 x 1944 pixels and a sensor size of 7.18 x 5.32 mm. Divide one dimension by the number of pixels in that dimension, e.g. 7.18 / 2592 = 0.0028 mm/pixel = 2.8 microns/pixel (a micron is one millionth of a meter or a micrometer). A 7 megapixel camera might have 3072 x 2304 pixels and a sensor size of 7.18 x 5.32 mm. That means the camera has 2.3 micron pixels. I liked the images from the 5 megapixel camera better when I compared 2 such cameras.

The Megapixel Race

I view the megapixel race like the stereo power race of the 1960s and 1970s when manufacturers were hyping power with different units like peak versus RMS power. Once stereo power got to 50 or so watts per channel, it became a non-issue for most people. Megapixels are similar, but people have to dig to find pixel size. Once quality pixels reach 8 or so megapixels, consumer cameras will probably plateau out. By quality, I mean a bit larger than current pixel sizes. The above statement was made in November, 2006. Obviously, the megapixel race has continued (November, 2008), and now we have P&S cameras with very small pixels having 15 megapixels.

**** The problem with such small pixels is that they do not gather much light, and that leads to visible noise in images.****

This problem is also extending to larger sensor DSLRs with 1.5 to 1.6 crop factors DSLR with 15 and more megapixels.

Many small point and shoot cameras have pixels less than 3 micrometers in size (2006) and the pixels have become smaller with some now less than 1.8 microns. The sweet spot for pixel size is in the 6 to 8 micrometer range. DSLRs have already reached that sweet spot (pre 2006) but are now pushing lower with some DSLRs having pixels smaller then 5 microns. In November 2006, I predicted the advanced amateur DSLRs will move to the 12 to 16 megapixel range with pixels 6 or more microns in size and the good quality consumer point and shoot cameras will move to the 8 megapixel range with close to 6 micrometer pixels. We now have DSLRs (2008) in the 12 to 21 megapixel range (fall, 2008) spanning a range of 8.46 to 4.7 microns. The larger pixel sizes are in the full-35mm-frame sensors (24x36 mm), and the smaller ones in the 1.5 to 1.6x crop sensors (about 15 x 22 mm). P&S camera sensors are typically about 5.7 x 7.6 mm and smaller.

http://www.cnet.com.au/1080p-shootout-iphone-4s-vs-canon-5d-mark-ii-339324830.htm


iPhone 4S / Canon 5d MKII Side by Side Comparison


Robino Films offered this view in the comments: "This test is really only to show that the 4S is coming close to the 5D, but in no way is it better. The iPhone is a great 1080p pocket camera and shows us where technology is heading. Give it two-three years and we should see some interesting micro high-performance cameras."