Apple (AAPL) will have no choice but to make a larger iPhone. This is something which is becoming more obvious as the days go by. At first, it seemed just like something the Android phones could do - they could differentiate over a much larger number of form factors, and hence they'd have larger, as well as smaller, screens.
However, right now this trend has morphed into something else. It has turned into a definite disadvantage for Apple. And it's a disadvantage Apple doesn't need to have, since Apple continues to control the best ecosystem with iTunes.
There are two main motives why larger screens are becoming highly desirable:
First, as the smartphones see increasing web and media usage, a larger screen shows itself to be significantly better. Web browsing is much easier to do on a 5" screen than it is to do on the iPhone's 4" screen. Also, screens are converging towards 1080p resolutions - 1920x1080 pixels. This is the traditional HD resolution we're used to from our home LCDs. It will be the natural resolution to see video. It's now rumored that the upcoming Samsung Galaxy IV will have precisely that resolution on a 5" screen.
Second, there might be a demographic angle for the larger screens as well. In the richer countries, such as the U.S., much of Europe or Japan, the population is getting older. In the U.S. you have the baby boomer cohort retiring massively. This segment of the population controls significant buying power and is now also familiar with web browsing. But for this segment, seeing is not as easy as it once was. A larger screen makes this task much easier, and it can become a decisive factor when choosing a phone.
Why hasn't Apple followed the trend
Jony Ive explained it during the launch of the iPhone 5. Apple wanted to keep the ergonomics of using the iPhone 5 similar to those of the iPhone 4S, allowing for single-hand operation. Hence it kept the width of the phone and just increased the length, making for a slightly longer screen. This means Apple already saw the need for a larger screen but still went with a compromise. But since every other competitor continued to bring larger and larger phones, the compromise cannot hold for much longer. The Samsung Galaxy IV at 5" is probably the drop in the bucket which will spring Apple into action.
In a way, we could say that at this point, screen real estate has superseded the need for single-hand operation.
Much like with the iPad, Apple will change course
For a while, Apple faced the same dilemma regarding the iPad's screen size. It's well known that Steve Jobs said 7" screens were simply too small for tablets. And yet, during 2012 Apple finally came out with a 7" iPad mini. Apple bowed to the advances its competitors, namely Google (GOOG) with the Nexus 7 and Amazon.com (AMZN) with the Kindle fire were making.
The situation is exactly the same with smartphones. As every competitor - Samsung (OTC:SSNLF) chief amongst them - keeps pushing larger screens and these find ready acceptance in the market, Apple has no choice but follow suit.
Also, like with the iPad, it's likely that Apple will broaden its product offering, keeping the present form factor, and introducing a new, larger, form factor alongside it. The rumors regarding a larger iPhone are already swirling, but they usually point towards a larger, but cheaper, model. It remains to be seen whether Apple would want to cheapen its image. That's a path it didn't take with the iPad mini, though its specs could be higher-end, something which Apple is probably going to address during 2013.
Other relevant smartphone news
HTC's monthly revenues for February 2013 plunged 44%. It seems likely that the entire smartphone market is cooling down while also being oversupplied by countless companies. This has negative implications for Apple as it's almost certain that it, too, is seeing part of this slowdown in its own sales.
At the same time, concomitant with further iPhone supply reductions, comes the rumor that the iPhone 5S is entering production. The iPhone 5S is not yet the larger iPhone I've talked about here, and with the same design and slightly higher specs, at this point it's not likely that it will be enough to rekindle sales.
Much as it happened with the iPad, the competitive realities of the marketplace should be enough to drive Apple to launch an iPhone with a significantly larger screen. The Samsung Galaxy IV, about to be launched and rumored to carry a 5" 1080p screen, should be the enough to push Apple over the hedge and make it launch its own larger-screen model.
The trends toward mobile web usage as well as aging of the population make this move by Apple all but inevitable.