It can be hard to market quality vs sheer numbers. Hell, the rise of the "phablet" and the lack of high end smaller phones other than the iPhone sort of proves that. Although I agree with you, they should try exactly that.
I don't see that as an example. Many informed users like their "phablets" a lot - anecdote: I'm surrounded by 16 Android users vs 1 iPhone user, all of then have larger screens and like them, and discuss the merits of their phones.
I dislike "phablets" as phones myself, so I use a Nokia phone as a phone (much better phone quality and longer battery life) and have an Android phone as a tablet with 3G.
Also, there are lots of smaller versions of Android phones, the S4 mini might not be what you want but it sells really well over here.
