Given that they've dropped the other sizes and went to just 6" (which is what they started with), I take it that they realized that most people prefer the 6" and are just more price conscious. Of the previous two generations, the 5" line sold the most, because it was the cheapest, but when you look at over all ereader sales from all companies the 6" models win out. If size was that big of a deal, Sony would have cleaned house last couple years.
According to this IDC study, Sony sold 800,000 readers last year and was still in 5th place overall world wide, behind Hanvon, B&N, Pandigital, and Amazon (listed in ascending order). There was a reason they started with 6" readers, there is a reason the competition is mostly 6" readers. I'm sure that they just didn't randomly make that size without doing consumer and ergonomics studies, even if it wasn't the manufacturers of the devices but rather the display manufacturers.
Knock size out of the mix, and you're left with the difference being price. On all counts, Sony was way more expensive than their competition. MSRP started out at $179 for the 350, and it was the lowest priced Sony, where as it was going up against $139 Kindles, Kobos, and nooks. I mean, why would Sony release a product to the market when their competition already had their products priced at $40 cheaper. It isn't like Sony released the 350 at $179, and Amazon and Kobo uncut them afterwards. Kindle, Kobo, and nook were $139 for months before the Sony x50 line launched.