WP8 Would Look Ridiculous at 5" - Is that a Problem?
In my opinion, no smartphone OS on the market was designed with a 5" screen as the ideal size, but after playing with an HTC Droid DNA in a Verizon store (while buying an 8x) I would not be surprised if the market settles largely on the 5" form factor. I am assuming that the phones will get lighter, thinner, and have smaller bezels. If there were a 5" phone with an app ecosystem designed for that screen size, it could mostly replace the market for e-readers and mini-tablets. But remember, the iPod touch is still around for those who don't want a data plan, so mini-tablets wouldn't go away entirely.
Even if all of that conjecture is in left field (in which case, I'm sure you will point that out for me) the fact remains that most of the Windows Phone OS interface was built with ~3.7" screens in mind. Many core apps would look ridiculous on a 5" screen--Music and Store specifically come to mind. Other apps could clearly be expanded in functionality with larger screen real estate--Office in particular. Adding small tiles was a big step in the right direction for adding functionality with larger screens, but I think many many other portions of the OS would need similar attention. Its not just a matter of adding hardware support for 1080p. Its an interface design problem.