A phone is like any other computer: just an empty shell.
Software breaths life into it and there is plenty of room for innovation here. Unfortunately the free update duopoly of Apple and Google has no incentive to change things.
A good example is ergonomics. There would be nothing wrong with large phones if they hadn't just stretched their OSes and called it a day.
A phone has to adapt to multiple situations and one of those is one-handed use. The other could be holding a rail or a child's hand or shopping or a burrito. For some people it might not exist at all.
There should be no portrait interactions outside the reach of a thumb yet this is precisely where notifications and control toggles lie. On iOS its even where the back button normally sits.
There isn't room for hardware innovation. There doesn't need to be: the market has been happy for HP, Apple, Asus et al to continually repackage the Powerbook G4 for the last 20 years. But software? We're only just getting started.