I'll never understand why certain apple pundits think choice is bad. If they make a 4" phone and a 5" phone, you don't have to buy the 5".
No, but lots of apps will get fragmented or letter-boxed making one or the other size of phone less desirable for running those apps.
I'm hoping for a new smaller iPhone, even smaller that the 3G. Apple often surprises the market by going opposite from what all the pundits think is best, and minting money with their surprise change-uo. A ton of people thought the original iPhone (and 3G and 3Gs) was too big (especially for small hands and small pockets). Maybe to the tune of many Billions of revenue?