IMHO, the size has to do with Apple targeting the mini at the auto manufacturers. If Apple negotiated deals with BMW, Volvo, Mercedes, and I don't know who else to put iPod hookups in their cars, I can't imagine the talks were limited to iPod hookups. All those manufacturers have fancy in-dash navigation systems. I think Apple is aiming at that market.
I could be wrong, but it is the only thing that makes sense to me as to why the mini is the specific size it is.