The tablet-esque sizes coming in Android flavors, like the Galaxy Note, are designed for a subset of the smart phone customer base. However, the core droid market that is supposedly eating Apple's sales has long ago moved to devices in the 4-4.5" range. Despite what we have been told, they are completely usable with a thumb for anyone with hands larger than a chimp, and that wider screen has some ease of use benefits over the long design the fruity elves picked. That screen growth pill allows for larger on-screen keyboard buttons which can greatly improve accuracy and speed. For app developers, keeping the dimensions the same allows for design compatibility with all existing apps, a feature that is critical in the already too segmented Android market. Visiting web sites is also greatly enhanced since it is the width that is at least as problematic when you consider how we normally hold our phone.
Practical reasons aside, while many may have preferred a screen size similar to an HTC EVO 4G, I firmly believe Apple made the right choice. They needed a design that made their most profitable product distinct from the "cheap plastic" that flood the market today. You will be able to recognize an iPhone 5 from a football field away, and that is important not just from a free Apple advertising perspective but for differentiating their customer base.
After years of the iPhone trade secrets being pilfered, it is also critical for Apple to secure a design that they can (attempt to) claim as theirs and theirs alone. If Samsung, HTC or anyone else were to steal the pseudo-widescreen dimensions of this device you can bet the Apple legal wasp nest will swarm quickly. However, given Samsung's recent court troubles, it is highly unlikely any other company will go down this road, so Apple has created a product that will be completely unique for years to come.
This design choice also keeps Cupertino from getting egg on their pretty new building. They have been saying for years that the 3.5" phone is the perfect size and that they would not consider making a larger screen. However, the market has said with their wallets that the small iPhone is the opposite end of the silly scale from the Galaxy Note phablet. This design allows Apple to stand by their statement that the width of the iPhone is still perfection while also yielding to the core market that wants more screen real estate.
As usual, Apple has found the perfect compromise between saying they were right while giving their customers want they want. The result is a distinct look that may be linked forever to only the iPhone. It would not surprise me to see this widescreen design land on a new version of the iPad. We will see.