The danger if they do nothing now is that the relevance of other Microsoft apps like Office will deminish as the joy of having a tablet outways the pain of not having Office. People will find ways around not having Microsoft apps on tablets. Those people include businesses who also start migrating LOB apps to the tablet. Replace the PC with a tablet & dock with mouse & keyboard (for those who's job requires it) and you're off to the races. There will absolutly be a good chunk of people left on reguilar old PCs but more and more will find a way to jump ship just like they did moving from plain old cell phone or feature phones over to smartphones.

If I were running the Office team I'd start thinking of following Bing's example and start writing versions for iOS and Android (or port to Silverlight for WP7 and Android).

One other point -- with virtulization being more and more popular I suspect that the PC market will in part contract because people will no longer need a couple of PCs around the house or a dedicated PC at work. Instead they will RDP (or similar) to one PC in the house or a shared virtual PC at work when they need to use legacy Microsoft apps. I've seen some hackish demos of Evo's hooked up to a bluetooth mouse, keyboard, and monitor driving a PC through RDP. I look forward to the day when I can stop carrying my laptop around...