"A 7″ diagonal screen (7.08″ to be exact) just happens to be the exact size of two by two iPod touch retina displays. That’s a 4″ x 6″ display surface. An iPod touch screen has 326 PPI. The 7″ screen would also have 326 PPI just like iPhones and iPods. This would yield a resolution of 1920 x 1280. This resolution would be able to run current retina iPhone applications pixel perfect using the traditional 4:1 pixel scaling, like retina displays do with non-retina apps."There is a lot of good logic to this article, and I think it's definitely the way to go about creating a Retina-caliber mini-tablet. I do see several potential problems with this argument, though. I don't think Apple would create a Retina-caliber device without the intention of fully utilizing those pixels. This means Apple would need to create a native 1920x1280 pixel development target. Unfortunately that would create several problems for developers and consumers. First, universal apps would need to include yet another batch of optimized graphics for the device. This will do nothing but take up extra space on every existing iOS device and cause developers extra work on top of it. Secondly, would developers even be motivated enough to create a native version of their app if the standard iPhone app runs flawlessly? I'm sure many wouldn't. Unlike the iPad, an iPhone's UI controls wouldn't appear as comically large on a 7" device. Also, for the developers that do not distribute universal binaries, would you sell this as a completely separate app? If you tried, people would likely just buy the iPhone version—especially if you aren't going to rethink the UI for a 7" screen. Finally, is there even any reason for a half-tablet to exist if it mostly runs the exact same apps as your phone?
None of these problems exist for the iPad mini. The only downsides that device has is smaller tap targets, and no retina screen. I'm not even convinced the screen resolution would be an issue. It wouldn't be a Retina screen, but it would have significantly higher PPI than the original iPad and iPad 2. If Apple released this product for $299 they could definitely get away with that.
If we find out that Apple is indeed going to be bringing a mini-tablet to market, my gut is telling me it'll be the iPad mini, not the iPod maxi.