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.
Scaling down will only work when you are simply providing added options to existing product.
The unique selling proposition that Microsoft is trying for is legacy. If they go head to head with Apple and/or Google then they will lose. WP7 on its own doesn't have enough to beat them. When folk see it they think 'Well, none of my apps will work, and all my files are going to lose all that nice formatting, so why not go to a more mature platform and start again?'
This is why MS is obsessed with cramming the desktop into a tablet, because it enables them to use legacy to shield them from the competition.
There are plenty of skeptics on the future of the iPad model though, including myself, even though its popular among bloggers.
Well, I'm seeing iPads and laptops in pretty equal numbers now, though I still can't say I completely understand what the attraction is.