If I could get a 4.8" iphone...why would I want a 7.9" mini. I would just skip the tablet all together and go laptop.
iPad Mini: from £269
vs.
iPhone 5: from £529 (unlocked) - or hypothetical iPhablet from, what, £629...
MacBook: from £849 (...and beyond the infinite)
Hmm... let me think...
OK, I don't know what profit margin they get on an iPhone versus an iPad, or how much they rake in from an of iPhones sold on-contract - although I'm pretty sure that the 'unlocked' prices of phones (from any manufacturer) are deliberately inflated to make contract deals sound good.
Whatever, I'm sure it would be better for Apple to have their own iPhablet eating into their iPad sales (with the compensation of some extra laptop sales) than Samsung and Google eating into their iPhone
and iPad sales.
You might just as well argue that the iPad Mini cannibalises iPad 4 sales, the iPad 4 cannibalises Macbook Air sales... and so on. Provided Apple get their price structure right and plan their production volumes wisely, auto-cannibalism isn't an issue.
There's a pretty well-defined market for phablet vs. phone + tablet: people continually making/receiving voice calls and one-handed texting will mostly prefer a small phone + tablet when they need it. The main phablet market is for those of us who want a pocket-sized internet appliance/media player/GPS/Game console, with making voice calls several places down the priority list.
Personally, I've always seen the 7" tablet as the nonsensical option: too big to fit in a pocket, too small for the 'laptop replacement' possibilities of a 10" tablet (e.g. multi-fingered typing). The really successful 7"-ers like the Kindle Fire and Nexus 7 have also been end-of-argument cheap.