[[Actually if it had had the 5MP iPhone 4 camera, (which is probably what he assumed since I assumed it too until I looked at the tech specs) he would not have been joking, that could replace a P&S for most people.]]
You don't understand the difference between "better than" and "willing to settle for."
People who are replacing their digital cameras for the iPhone 4 camera are not doing so because it is better than their point and shoot. It's not. They're giving up a number of features they don't understand, don't know how to work, or don't find important for a single button, slower operation, and lower image quality.