Apple wouldn't leave money on the table in an effort to save face. It came out in the Apple vs. Samsung lawsuits that they were caught flat footed.

From a technical standpoint, they could have released larger phones before they did. What stopped them is that UIKit and iOS apps were not designed to handle multiple screen sizes or any screen except for the 4 inch iPhone and the 9.7" iPad until iOS 7 and support improved in IOS 8.