I can respect that there's a market for phones featuring larger screens, but I do think that it's somewhat of a trend that will die off as time goes on, especially as tablet adoption (can we just say iPad adoption at this point and not feel like an Apple sloppy?) continues to increase. I think there's more to be said about the benefits of the smaller iPhone screen than some admit. I've known several people who went for a phone with a bigger screen, and initially they really liked it. There's something to be said for a bigger screen too. But when they got iPads, suddenly they started wanting a smaller phone again.
I think the Phablet thing is a lot like Blu-Ray players with consumers. Do Blu-Ray players have something to offer? Sure. Are some people really going to appreciate what they offer and understand why? Absolutely. But they're a gateway for streaming services, as most come with Netflix and Hulu and countless other streaming options now, and once people get a taste, very few actually use the Blu-Ray functionality. More and more are just using streaming boxes or video game systems and skipping Blu-Ray altogether. And pretty soon, Blu-Ray will just go away and everything will be streaming.
I'm not saying Phablets are exactly like that, but I think as more people get tablets, they're going to be a lot less concerned with having a phone with a large screen. After all, it's a phone that goes in your pocket or purse. More often than not, the smaller the better when you're being truly pragmatic. I don't think iPhone should get smaller, but I just don't think we'll be talking about this in a few years.
But I do think Apple will put out a 5" device soon, and Tim Cook made as clear of a comment about Apple being open to it as Apple makes about devices that haven't been released. I don't think it will make as much of a splash as some people think though, and I think the 5"+ market will be a fairly small niche market in 3-4 years. And on a somewhat related note, I think the iPad Mini was and will continue to be a much more important device for Apple than a 5" iPhone will be.