While a device of that size might technically enable well-authored apps to work within a ‘comfortable’ range for touch interaction, most devs design for the current form factor and how that feels, not for specific numbers. Games and apps are designed for hitting targets on a ten-inch device. (…) At best, the app would be fiddlier, harder and less fun to use.
While this is true, there’s something else to consider: not everybody has the same hands. The iPad works well for the average adult man, but children and women often have smaller hands and fingers. Decreasing the screen size from a diagonal of 9.7 inch to 7.85 would only decrease the width and height of each touch target by about 20% — this difference is way smaller than the size difference between the hands of an adult man and a child.
In fact, back in 2009, I argued that Apple should make an iPhone mini for people with smaller hands. I still think so, and similar reasoning applies to the iPad.
Of course, not all apps would work well when scaled down. But for the vast majority of apps, it shouldn’t be a problem, and might actually make them more usable for some people.
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