This is the product upon which keeps Microsoft relevant and swimming in cash. Folk still use and buy Office, mainly because it is a good package (though I'm starting to find it overpriced and a little bit heavy) and because it is the most reliable way to view and edit almost two decades worth of documents written in previous versions of Office.
Now if you believe what the pundits tell you then desktops/laptops are going to give way to tablets for the majority of uses, which means Microsoft is currently at the head of a monopoly market with decreasing relevance.
What they don't want is to find themselves forced into virgin territory and have to fight competitors like Apple and Google. Apple especially who are championing smaller, nimbler, focussed applications with a consumer-friendly price tag. Microsoft doesn't reaallly want to smaller and tightly-focussed; their expertise is monolithic and expensive. So if they have to move into this strange new world then they would like to take monolithic, expensive and as much of the monopoly with them as they can. This means a full-blown office suite running on a tablet, and that means a full-blown OS to carry it.
From a business point of view this makes sense: it's safe to assume that WP7 sales are nowhere near the sales of Android or the iPhone. At the same time, it's a safe bet that the number of of Windows7 machines deployed already dwarfs the entire Mac user base (and that's not counting the number of Macs that run Windows pretty much full time). So if you were Balmer, wouldn't you try to take as much of that influence with you?
Whether this is best for consumers or Microsoft I'm not sure. We shall wait and see.
They've already made scaled down versions of Office in different formats. They could easily retool WP and Office for WP to a tablet form if they really want to. There are plenty of skeptics on the future of the iPad model though, including myself, even though its popular among bloggers.