I agree, 4" it's too small for a smart phone these days. Not smart enough.
I tried Galaxy Note and that is a bit too big at 5.5" though still very nice.
But 4.8" Galaxy S3 is a sweet spot for me size wise: the soft keyboard is large enough, you can read ebooks easily, browse sites easier and it is still very pocketable though I use belt holster.
If Apple wants to compete, they need to offer 2 or even 3 sizes: 4", 4.8", 5.5" phablet. And they need to do it fast. Consumer likes choice and everyone has different needs/preferences. I guess the problem is that the "pixel-perfect" iOS does not handle various sizes very well. iOS needs to be rewritten to handle fluid layouts and various screen sizes. Otherwise, you have that "fragmentation". Apple is stuck with it. Apple rushed to the market with original iPhone with OS which is not future-proof.
On contrary, Android OS works with various screen ratios/sizes, even with tablets, digital cameras and refrigerator displays. Smart enough.
I beg to differ. The problem of Iphone market share is not the phone size, it is the affordability outside of US and Western Europe where the income level can support Iphone price point. Samsung S3 look to be ending it's run selling about 40M unit. Apple sell 37M in 4Q11 when they launch Iphone 4S. And majority of the Android sold in 3Q12 (where the 15% Iphone market share come from) is not big screen size Android, it is the $150, $200, $300 dollars Android device that is sold outside of the affluence countries. If Apple is serious about the market share issue (and they should, otherwise we will have a replay of Window PC vs MAC scenario again), they should tackle the $300-$400 unlock smartphone market. Right now Iphone has 45% to 60% gross margin (not net margin), ipad has 23 to 32% gorss margin (per Samsung trial document), and Ipad mini probably in the mid-teen gross margin, Apple can afford to design a low end Iphone that has 30-35% gross margin and a price between $300-$400. Outside of a few countries, LTE is useless and Apple can cut out a lot of the high end stuff (e.g the really nice camera in Iphone 5) and customer will still love the IOS environment. And they can probably sell 2 to 3x as much Iphone + Iphone value line. This will get them to at least 30-35% market share consistently. The $100-300 smartphone has no profit in them and I don't see Apple tackle those unless they are really desperate in spreading out development cost.