When you release 1 model every 12-15 months as Apple does with the iPhone it's very much a case of one size fits all!! They cannot afford to speculate or gamble on screen size and what most people are comfortable with and others not.
A huge amount of research has probably gone into 3.5" and why that is ergonomically the most suitable size for a smart phone.
Having said that they under increasing pressure to go above 3.5", maybe 3.7" or 4".
And perhaps it's time for more than 1 model or time to differentiate models not only through hardrive capacities but screen size too. IE iPhone 5 3.5", iPhone 5 4", iPhone 5 4.3"... Accommodate folk who looking for more real estate from their handsets without alienating those who are comfortable with 3.5"....