As I see it there are 3 possibilities:
1) Add space vertically
2) Add space both vertically and horizontally
3) Change the pixel density
1 is probably the best option, it will get the most utility, fewer things will need to be changed, easier on the developers, better for video, etc.
2 will be a nightmare, involve a useless border, funky <1.2x scaling, require a redesign of keyboards, icons, etc.
3 will bring nothing but slightly larger widgets, and larger targets to hit, and the ability to hold the device further away.
I don't think they really need to enlarge the screen, but if it will expand their potential customers base, doesn't make the phone larger than it is, and adds more content area while the keyboard is up, then I think it will be a smart move.