I see what you are saying but with that logic a projection screen in a theater would need to have some outrageous resolution. I'm no expert on this but viewing distance has to be factored into the equation at some point. My example is that as you get closer to a large screen you can see individual pixels and things may look like crap, but as you move away those pixels appear to be closer together and the picture looks fine. Obviously more resolution would be desirable but I certainly don't find 65" plasma too big for 1080P at 8-10' viewing distance. It may look poor with SD content, particularly if it is heavily compressed, but with a good source it looks excellent.
If I were to put in a projection system in a theater, it would have to have expensive line scalers again because 1080 "just dont cut it" above 60" for me. Anyone remember back in the days of LD's and projection systems and the Faroudja line doublers/ etc...? I would need the modern equivalent of that in the digital world.