It's a simpsons reference re: fat fingers and dialing wands. Hes saying theres not enough room on a 7" for workable sized buttons, but the counterpoint is that it's as big as it is and you go with what fits.
It seems a bit silly for Jobs to argue that a 3.5 inch mini-tablet is awesome (iPhone) and a 10 inch tablet is also awesome (iPad) but anything in between is just a bad idea.