The iPhone is already the highest-DPI display that Apple sells, and to double its resolution is very expensive: the panel costs more, it’s likely to use more power, it places higher demand on the CPU for rendering, it needs much more memory for frame buffers and textures, and it incurs big costs on developers [or possibly not — ed.] and Apple’s developer-tools and developer-support teams. In other words, it strains nearly everything that is already strained.
Those are all the reasons why I didn’t think it likely that the iPhone would get a higher-resolution screen, but there’s a simple thing that trumps all:
Steve Jobs has seen a Droid or Nexus One, and he wants his own iPhone to get a higher-resolution screen.