Since its debut, the iPhone's screen size has remained the same. It's gained pixels, sure, but the dimensions have long been a selling point as "standard" across the line. As Apple has extended iOS updates downstream, this has also become a powerful selling point for iPhone "feature" phones. Formerly that was the 3GS, but the 4 is now becoming free on contract in some cases.
The iPhone 5 now has a larger screen. Older apps will run in letterbox mode, but as someone who worked at Blockbuster Video back in the '90s, I can tell you consumers don't "get" letterboxing. Consumers will expect developers to just make it look right. Probably using magic.
TNW spoke to a few developers about how they feel regarding the screen change. Overall it sounds like everyone is on board with the additional screen space, but making changes to some apps will not be a trivial task. In apps which rely upon Apple UI elements (like lists or text or drawing surfaces) the change will be easy, but some of those awesome apps with amazing interfaces will need some heavy lifting to scale.
The biggest complaint is the aggressive timeline of just two weeks to update apps, and that means developers won't really get to test apps on the device. For those who truly care about the experience, being unable to test how an app on the iPhone feels in your hand is invaluable.
As a short guy with smallish hands, I recognize the concern that buttons at the top of an interface may require some thumb-lengthening (can't wait to see those Kickstarter projects turning old magic thumb tips into "capacitive extenders"). But I feel confident that the developers who are in the App Store for the long haul will update their apps quickly and appropriately.