Actually I'm not opposed to the slightly larger screen. I think what the taller screen does is give it a true 16:9 ratio. Make watching movies, recording video etc much better.
But regarding what you said about "caving in", couldn't agree more. The one thing I admired about Steve Jobs (Aside from not allowing ______ to happen), is that he didn't seem to care about what the market was doing, at times ignoring market research. He did what he believed would work. Sometimes it worked out perfectly, many times it did not, but he preferred to lead and not follow. It used to be "Apple has abc, we should make abc". It seems that Apple is slowly moving away from that philosophy, e.g. iPad mini. Everyone else is doing it, we need to do it.
I'm ok but not happy with a screen that is 4" long as it doesn't get more than that though I'm different than you, I wish they at least kept the same aspect ratio cause honestly, I don't see why anyone would use the iphone mostly to watch video/movies with. No smartphone will be big enough (Without being completely too big to be a phone too) for that. I think the iPad is kinda small for watching tv on (and I only need that for when I'm doing dishes/cooking) honestly. Other than that, I find 16:9 awkward for computer uses (yes, most monitors are going to that but that's cause it's cheaper for manufacturers to make one aspect ratio than two so since tvs are made that way, it's easier to just make monitors that way too).
And as for the 7" ipad, I think there is definitely a use for it (for what I want the ipad is kinda big. I only have one cause my mom gave it to me but I was not tempted to buy it and I would have easily been tempted to go for the 7" nexus cause it's exactly what I want. ANd if you can't tell by my sig, I have a lot of Apple devices so having an Apple tablet would have been nice for the integration with the ecosystem (but not necessary imho, it's a nice extra). I think for my uses for a tablet (I mostly want it to read books with but I do want to play some games, and yes, the ipad is kinda big for that too. My favorite game is a helicopter game and trying to hold the ipad and move it around gets tiresome on your wrists cause it's so big). So I'm an argument of why it may be good to do a 7"... here you have some one using an apple device willing to go to Android cause the 7" is a better size... and,well they want mindshare.. that gets me used to using Android. And what happens if I decide that Android has something else I like... well I'm already used to using it, it's a foot in the door to get me to change my mind and go with their stuff instead. In the end, Apple is about making money and needs to be regardless of one person's vision or apple goes away (and his vehicle for his visions would go away too). And losing customers is not making money.
Also, I'm not willing to say what we see now is a function of Steve being gone, for one it's way too soon to say that, for two Steve has already been known to say one thing and then Apple does another (whether it be because he changed his mind, was harassed into it, or was just misleading people when he said it cause he didn't wnat to give away what Apple was doing), so them now making an iPad mini... well that could have easily happened under Steve (as well as the bigger screen on the phone).