With the rise of 5", 5.5", and even 6.4" "smartphones" like the Sony Xperia Z Ultra, it's starting to make less and less sense for people to buy one of those and also a 7" tablet, and Digitimes seems to confirm it:
In the past 12 months, the 5-inch display segment has seen growing popularity in the smartphone market, but tablet vendors have still been able to defend their 7- and 8-inch tablet sales. However, as many vendors are preparing to launch models with a screen size over 6-inch in the second half, a head-to-head competition between smartphones and tablets may not be too far away.
This is also the reason why I wanted the latest Nexus 7 to have at least a 7.5" or 7.7" screen, or even an 8" one. I don't think 8" is ideal, because it's too wide, possibly even for a 16:10 screen ratio, but at this point I'd take one that is slightly too wide, than one that is just too small, like a 7" screen. In a world of 5" and 6" "smartphones", a 7" devices doesn't offer you much benefit, which means you'll be a lot less likely to get one.
One advantage 7" tablets still have over all these huge smartphones is their price. Most of them are around $200, and may not have the latest and greatest chips in them, but they do the job. But this is also one of the reason why OEM's are starting to move away from 7" tablets, and try the "large smartphone" route, because the smartphones cost more and are more profitable, while 7" tablets aren't - especially when they have to compete against the Nexus 7.
Smartphone vendors' move is not only changing the ecosystem of the smartphone industry, but also showing vendors' intention of seizing demand from the 7-inch tablet market, which is already plagued by a fierce price war.
With large-size smartphones computing performance and functions improving further, 7- to 8-inch tablets' growth may start slowing down.
In the not too distant future we may even see 8" and larger tablets to slow down their growth, too, as more people get accustomed to using 5"-6" smartphones, although I'm sure a large portion of the market will still prefer smartphones that sit comfortable in their hands. Fortunately for them, they'll still be able to get at least 4.7" screens in smaller phone bodies, as the Moto X has shown us.