This is a great discussion, and I hope camera vendors are listening.
My current favorite (existing) camera in this category is the Panasonic LC1/Leica Digilux 2. Granted, it has some serious limitations (lousy at ISOs other than 100, somewhat ugly EVF, no RAW buffer) but it has a lot of what I want in a digital street camera. Even now, used ones are overpriced (the Leica commands too much money because of the red dot, and the Panasonic, while cheaper, is hard to find).
I agree with Mike more than I disagree, so I'll just touch on points where our opinions differ:
- Controls - I really want basic manual controls. I need to be able to set aperture and shutter speed manually. I want traditional rings/dials, NOT push-buttons or menus. Exposure compensation in a prority mode isn't the same: it doesn't engender the same mental process. I do NOT want to have to turn on the LCD and scroll through menus to change anything pertaining to basic shooting controls (at least focus, shutter and aperture must be manual; menus are acceptable for ISO & white balance). The LC1/Digilux 2 is a winner here and I'd keep that type of design for my DMD.
- Sensor size - I'm on the fence about this. If you're shooting handheld, at a low ISO with a fast lens wide open, the DoF of a small sensor can be an advantage. While I'd prefer the noise characteristics of an APS-C sensor, using a smaller one also keeps the camera and lens smaller. I find Sony's "spiffy new R1" heavy and awkwardly-shaped for a street camera. For me, personally, I wouldn't use the DMD for anything I meant to print bigger than 11x14, so a smaller sensor (with its noise) isn't a disaster.
- Recording mode - RAW-only is fine if the camera has a reasonable buffer. However, that's expensive. Neither the Ricoh mentioned previously in this thread nor the Leica/Panasonic have a RAW buffer, which makes them impossible to use in RAW mode for some subjects. If the DMD is NOT going to have a RAW buffer, it would have to have a usable JPEG mode.
AF Lock - why bother implementing this the way Mike describes? Just put a focusing ring on the camera and allow manual override of the AF. There are plenty of existing examples.
One thing Mike doesn't touch on is cost. I can't justify spending more than $1000 on a secondary camera. The DMD isn't a replacement or backup to a DSLR system, it's a complementary tool and it needs to be priced accordingly. If a smaller sensor and RAW buffer are what it takes to keep the costs reasonable, I can live with that as long as the other requirements are met. The fact that our hypothetical DMD is NOT a mass-market product and probably wouldn't sell in huge numbers does not help in the price department.
I don't expect that there will ever be a "perfect camera" that fits everyone's ideas of what the DMD should be, but I hope that camera makers are listening. We have good products in the DSLR space, and the development of small, light, unobtrusive cameras that take full advantage of digital's creative potential (without bogging them down with consumer features) would be a big step forward.