Never ever do I read on the phone (3,5" screen). On rare occasions I read on my 7" Nook Color (rooted, only used as a tablet). When going somewhere where I suspect I might have time to read my Sony 350 comes with me in one of the covers (I have both the lighted and non-lighted - unless I know I'll need light I prefer the super slim non-lighted).
I'm so happy to have the 350, because I'm not sure I'd be as happy bringing a bigger reader since I don't carry a big handbag.
I'm not at all surprised to hear that phones are more common than readers. I spent quite a lot of time on US airports and other waiting areas this summer, and saw very few eInk-devices. After all, the phone is so much better at almost everything besides book reading. Personally I prefer reading a book to playing a game or surfing the web while waiting, so I choose not to get a larger screen phone and stick with my current phone and the 350.