I've yet to find the perfect phone, so everything has been a compromise for me.
My first smartphone was a Verizon Droid X. With a screen of 4.3 inches, it was the reason I made the jump to a smartphone in the first place. Prior phones had smaller screens that I knew would make typing (I have large hands) and streaming media difficult.
However, it had bloatware, was skinned with the original full Motoblur, locked bootloader, and slow updates.
Because of this, I learned ADB, rooting, romming, and was able to "overcome" Motoblur, bloatware, but wasn't able to ever gain the full freedom of an unlocked bootloader, and it was 3G only.
When I decided to upgrade, I chose the Samsung Galaxy Nexus. It still had a larger screen, unlocked bootloader, little bloatware, and was 4G. However, it didn't have the signal penetration that my Droid X had and I missed the Motorola hardware.
I kept my Galaxy Nexus for nearly 2 years, but it was showing its age. My priority was to keep the freedom of an unlocked bootloader on Verizon, little bloatware, a stock android experience, and large screen.
At the time, my choices on Verizon were limited. I was considering a Moto X Developer Edition or a Nexus 7 LTE. At the time, the Moto X DE was around $650 new ($550 used). I was able to find a gently used Nexus 7 LTE for $300.
I chose to go with the much cheaper Nexus 7 LTE. It helped my transition that I never used my phone much to call anyway. On the positive side, streaming media, accessing the internet, and running many apps, was much easier with the Nexus 7. However, it was definitely not pocketable, and made texting and calling not as convenient, but I probably only call and text 25% of the time, so I made due.
Since then, I got a Moto X DE when the price dropped significantly. It's a great phone, but I still use my Nexus 7 as well, due to the larger screen size.
My hope, when I decide to upgrade, will be that Verizon will carry the Moto X+1 Developer Edition. I don't know if I'll purchase right away or wait a year for the price to drop. I'm sure the phone will be good for updates and running modern apps for at least two years. I'll probably miss having a 7 inch screen, but I'll compromise and make due.
There are people like me that genuinely like large screened devices, to stream media and use certain apps. For others, a large screened device is a compromise for having cutting edge specs. They may also install software-based apps to better allow them to handle the phone, making it less unwieldy.
To directly address, A895's question, I think many people enjoy the freedom of having one device, streaming media, running certain apps, and reading email are easier on a larger screen.
I also agree that many companies may not have the financial resources or desire to release a regular and small screened flagship.
As someone who has used a Nexus 7 as his primary device for 8-9 months, I can say with certainty that few people would want their primary device that big, so I am betting that future phones will level out at at somewhere between 5-6 inches.
We may not see a new top tiered phone with less than a 5 inch screen for a long time. However, I also think specs are becoming less important and LG and Samsung smaller screened-tier 2-devices will have specs that will be more than fine for most, without sacrificing performance. I could easily use a Moto X well into 2015.
A895 and others may need to make compromises too: Dealing with a larger device and deal with the inconvenience that comes from carrying and using a larger device, or having a smaller device, lower specs, rooting to get longer updates, while enjoying the increased portability and ease of making calls.
Priorities will always vary from person to person, but regardless of where the OEMs go, no phone will ever be "perfect" and the name of the game is compromise.