An affordable smaller tablet satisfies both lovers of a lower price and smaller form factors. Neither is mutually inclusive or exclusive.
With regard to keyboard input it's important to realize that the virtual KB is just one of many input modalities. With the new iPad voice
dictation has arrived. Not yet full Siri but for those that struggle to type yet can articulate well in a supported language they have another
method for inputing text.
The UI argument needs further examination. While the UI elements would indeed shrink it's important to realize the abstraction between a
drawn element and its corresponding "tap target"
Apple suggests the minimum tap target size is
44x44 points but that doesn't mean that the drawn element needs to follow. Put more succinctly Robo's point about a developer wanting to keep a 1inch drawn target on all iPads may not be ideal as the developer could simply modify the tap target irrespective of the drawn element. The only limitation would be a crowded interface that does not allow expansion of the tap target.
I contend that an overabundance or over-reliance on tappable targets is poor UI design in many cases. iOS is simply not OS X reduced down and simplified it's an new way of interacting with content and if the task manager Clear can deliver touch control with nary a button on the UI then developers need to look at how they can reduce the clutter of buttons and enable more intuitive swipes and other gestural controls.
This makes for a more transportable UI across various sizes of mobile devices.
So the question becomes who stands to benefit from a smaller and cheaper iPad model? I would think that there are plenty of consumers and businesses alike that wouldn't mind a tablet larger than an iPhone but even more portable than an iPad.
My ideal target would be:
.9 of a lb
10 hour battery life in Wifi (9 hour with cellular)
OLED or IGZO display for power savings.
802.11ac
Bluetooth 4.0
9-Axis inertial Module
Sub $300
The straw that stirs this drink is going to be iCloud. When you reduce the reticence of consumers to add another device to their group by making it easier to setup and manage you tear down a large wall.
Couple this with the move towards shared data-plans coming from AT&T and Verizon and the potential success for cellular based tablets improve as well.