Going Retina then, and only then
The Wall Street Journal reports that Apple is working with suppliers on a smaller iPad carrying a display in the range of 8 inches on the diagonal, down from the 9.7-inch display in the current iPad
They mean a ca. 20cm (7.9in) diameter screen, down from ca. 25cm (9.8in, 15cm × 20cm).
Anyhow, with this reduction to 80% the size, i.e. 64% the area, a QXGA 2048px × 1536px display would actually have about 330 px/in (vulgo dpi) and therefore qualify for Apples self-proclaimed Retina standard (i.e. more than 300 px/in), unlike the same enhanced resolution at the current display size, because there it had
264 px/in.
According to the report, Apple has played with various tablet sizes in the past,
Sure they have, and with different aspect ratios, too. Unlike some other major companies, Apple pays close attention to ergonomics, especially anthopometric and kinesiologic studies. (Thats why the iPhone and iPod screen is limited to 9cm, to be able to reach every point on-creen with your thumb when holding it with one hand, even if youre a 1,60m girl.) Nevertheless, the iPad display in particular is a trade-off between what is desirable and what was possible or affordable.
Squeezing the current iPad's resolution down to a smaller screen would also reduce the size of the interface elements on the device, and Apple is indeed said to be planning to move the current iPad's 1024x768 resolution to the smaller iPad in a move that would allow current iPad apps to "just work" on the new device. Testing with our "iPad mini" mockup suggests that interface elements would remain usable even at the smaller size.
Thats borderline rubbish. When touch interface elements become 80% of the height and width they were designed for (i.e. less than 2/3 the area), they of course still work, but not as good as expected. Apple certainly has conducted user studies to find out whether they would have to increase the virtual (pixel) size to stay closer to the original physical (centimeter) size. If they discovered theyre to small that might be good enough a reason not to build a 20cm iPad unless it would become the new exclusive size.