> on the software side it must have been at least a non-zero pain to deal with

Compared to the iPhone Duo now in the lineup? And the iPhone Air was announced with some pride from the Apple hardware team for its special miniaturized hardware.

There may not be a market for an iPhone Mini-sized device when looking at the buyers, but the custom hardware and tweaks to software aren't a clear consideration for Apple when you look at their behavior with other products.

By “pain” I mean “providing an acceptable experience” more than “needing to make different scaled apps.”

I think with the iPhone Duo you at least have a larger screen that the user can utilize. On the iPhone mini the screen was as big as it was going to get.

If the experience of using a specific app is bad, the user can open the phone.