Steve Jobs had it wrong: people do want smaller tablets after all. CNET points us to a note written by Citi analyst Glen Yeung making the case that the market for larger tablets such as Apple’s (AAPL) 9.7-inch iPad has peaked and that more compact tablets such as the 7.9-inch iPad mini and the 7-inch Google (GOOG) Nexus 7 will be the dominant form factors going forward. Yeung thinks that while Apple will still be a major player in the market for smaller tablets, the company’s profits will still take a hit since the cheaper iPad mini generates smaller gross margins than the traditional iPad.

“Beyond simply the overall share loss, the data reveals a particular slowdown in 10-inch iPad sales in mature markets and a clear downward trend in tablet ASPs (average selling prices),” Yeung writes. “After analyzing the data, we have new concerns about the health of the 10-inch tablet market and, absent any material innovations (we do not count a Retina Mini or lighter/thinner iPad 5 among these), we remain concerned about Apple’s ability to maintain market share.”

Yeung’s note comes at a time when Apple faces significant pressure on multiple fronts to maintain its historically high margins amid a flood of cheaper products based on Google’s Android operating system. The success of Android in emerging markets is one major reason why Apple will reportedly release a cheaper iPhone sometime this year that will help the company shore up its market share but that will also likely further eat into its margins.

Prior to joining BGR as News Editor, Brad Reed spent five years covering the wireless industry for Network World. His first smartphone was a BlackBerry but he has since become a loyal Android user.