This is, in fact, exactly what the hardware on other phones is doing: no matter how powerful their video hardware is, they've still gotta crunch the resolution down into the native screen size of the phone, and normally will end up dropping some details anyway because there's just too much data in a HD video for even high-end silicon to deal with in real time. You have to compromise (in many ways) to watch video on such tiny devices.

The advantage in re-encoding videos to match the native screen size of your phone is that you can actually increase the quality of the reduced-sized picture (as the software is not forced to do its resizing work in real-time), and because there are literally less bits being stored, you can support a higher bitrate (i.e., less compression) than you could with an HD resolution video.