When the Xbox 360 came out, it was substantially smaller than the original Xbox. But, most of the space savings came from moving a huge chunk of the power supply unit into the power cable! So now you had a massive cable and a smaller device, so it was really just for show. The overall system itself was still the same damn size!
Another consequence of thinner phones is less protection. Drop your phone once, and the chances you shatter the screen are high. There's an entire protection economy around phones-- everything from insurance to cases to glass screen protectors. All of these expenses and "opportunities" could be circumvented if they just made a fat, ugly, functional phone.