Smaller is better...
Of course you can increase capacity by increasing the disk diameter. Indeed, until not so long ago 5.25 inch drives were commonly available. Going back rather further, hard drives could be as large as 14 inches.
However, there are serious problems with doing this. Firstly is the simple issue that you have to spin these disks slower in order to maintain dimensional stability, Larger platters will distort more at high RPM due to the higher peripheral speeds and (therefore) increased forces involved. Go back three decades, and large disks were effectively limited to 3,600rpm, over four times slower than the fastest current enterprise drives, which currently run at up to 15,000rpm. (Whilst 15K drives are nominally 3.5 inch form factors, in practice, the actual platter diameters are smaller to allow this speed to be reached), There's also a more subtle reason why larger disks have to be spun slower. Quite simply, even if a 5.25" platter could be spun at 15K rpm, bit density would have to be reduced as it wouldn't be possible to write the data fast enough as there's insufficient time to polarise the substrate. Reducing the bit density would reduce the capacity so would, at least in part, undo much of the value of increasing form factor.
Large format drives take longer to seek to any given track as there's further to travel, and achieving the required level of accuracy for high track density becomes increasingly more difficult with larger form factors.
Then there is the issue that disk drives are essentially serial storage devices in that they can only read and write one track at a time (albeit with relatively fast access to a given track). It's not possible to put multiple read/write heads into an HDD due to vibration, airflow and other issues (other than old-fashioned fixed head drives, not feasible with modern bit densities). Note this applies even if you increase the form factor in the other dimension by just adding more platters - which also makes the mass to be moved higher.
The upshot of all this is your multi, multi-TB megadrive is going to be horribly slow due to very high rotational latency and seek times. Even the sequential access will be slow in terms of the amount of time it would require to read the entire drive as you'd be stuck with approximately the same transfer rate as we see currently. In fact tape has an advantage for sequential access as it is at least possibly to add more heads to increase the sequential data rate by using parallelism (which is why sequential data rates on modern LTO formats are so much higher than for disk drives - they effectively read/write 16 tracks in parallel).
So the large format drive is dying out for good reason. Already 3.5 inch drives is in slow decline as the access density (IOPs per TB and total device read time) inevitably worsen with increased areal density. (It's inevitable as capacity increases linearly with areal density, sequential data rates to the square root of areal density and IOPs are essentially fixed at a given RPM).