Hmmm. The way you hold an iphone to use its keyboard won't work that well with a 7" tablet (it's too big to hold that way). And the way you type on an iPad almost certainly won't work reliably on a 7" tablet (it's two small to use like a physical keyboard). You can get a feel for that by switching the iPad to portrait mode and imagining the keyboard being even slightly smaller than that.
7" would be great for certain apps that don't require a lot of typing but could benefit from a bigger screen. The order entry terminals that Apple uses in its retail stores, or devices that delivery or trucking companies use to display and track orders and shipments, all manner of things like that.
It's all in what you think the devices are for. Also, for the general user of tablet devices, once they are too big to fit in your pocket or attached to your belt, they might as well be the size of an iPad, since the portability difference is marginal. Again, for retail and transport style applications, the 7" size should be a bit better since the size is large enough to display good touch boxes for checking delivery, and is a better size than a smartphone for recording customer signatures, but the weight and bulk reduction will be nice for people whose jobs mean they have to carry it around all day long.
If my analysis is correct there, then 7" ends up being interesting, but in a much smaller market, and it probably won't result in much end consumer demand.