Given your 3.5" measurement, a 7" screen for the iPad would have been much better, would it have not?
Apple's not shipping a bigger phone yet because it's something they can hold back on until they need to do it. The iPhone 5, iPhone 5s, iPhone 5XL iPhone 6... one of these will eventually do it so as to sell you something new.
Maybe that's why Apple is pushing for voice recognition with Siri.
I still think people like big screens on smartphones and thumbs be damned plus nobody seems to like voice recognition or Dragon Dictate would be on every PC.
People like voice recognition, but its uses are limited. I use voice search on my Android phone every time I get in the car to go somewhere that I need navigation to, or if I need a map. That's about it, though; having conversations with your phone makes you look rather special.
If we want a device that would be comfortably operable two-handed you still wouldn't have a 7" tablet - the 7" tablet would still have a huge swathe of dead zones where no finger can reach.
You'd have basically two iPhone screens next to each other, portrait - that gives us 4.9" diagonal, maybe a smidge wider would still work, but nowhere close to 7".
That's the only way to guarantee a comfortable reach for all screen locations. A 7" tablet is still way too large if the goal is complete two-hand operability. That's not a design goal of a table though, in its normal use case.
In any case, I have no problems against the 7" tablet form factor, so I'm not sure what the issue is.
Apple's not shipping a bigger phone yet because it's something they can hold back on until they need to do it. The iPhone 5, iPhone 5s, iPhone 5XL iPhone 6... one of these will eventually do it so as to sell you something new.