Last week the Wall Street Journal, Reuters, and Bloomberg all reported that the next iPhone will have a 4-inch screen. Of course, no one knows for sure, but lots of evidence is pointing that way. The main questions have been whether it would create problems for developers and also whether it would fragment the market. iMore had a lucid article about Apple's options for a larger screen and what it would mean. If, for example, a larger screen changes the aspect ratio, it means that apps would generally have to be rewritten — and that it would take a lot of work.
GigaOm interviewed developers and has posted an article about their response to the possibility of an iPhone with a larger screen. One developer said that changing the aspect ratio (the ratio of number of pixels high by the number of pixels wide) would add a considerable amount to development time. It will also create a problem if Apple introduces yet another resolution. There are already two different ones that iPhone developers have to deal with: the retina display of the iPhone 4 and 4S, and the resolution of the earlier models. Developers are vary wary of the sort of market fragmentation seen with Android devices: lots of different sizes and shapes, and very difficult to create an app that works on all of them. This is a main reason that developers prefer to create apps for iOS devices.
However, the overall feeling among the developers, according to the GigaOm article is that Apple will be concerned about the challenges developers face and that they will either introduce a larger screen that will require few changes to their apps, or they will also release tools that will make it easy to adapt apps to a new aspect ratio or resolution.