Yes. The Apple iPad Mini announcement yesterday was indeed Apple's answer to Android smaller tablets such as Galaxy Tab 7.0 and Kindle Fire. Now, Google needs to venture even more, because after Windows 8 announcement, things might get a little more competitive.
Apple products are overly priced, but Apple has its own fan base, thus price is not a problem for Apple. This is a different case for Android. Current casual Windows laptops are now priced around Android tablets (around S$1000). Right now Android tablets have better sales because of the apps. However, with the launch of Windows RT, the whole thing might shift entirely as the apps (and games, and touch controlled apps) in Windows might be growing with upcoming Windows tablet. Now, it is true that for the Windows apps to grow, it will take time. However, the demographic now is really not in favour of Google.
As I mentioned earlier, the price of Android tablet often matches price of Windows laptops now (and of course, non OS laptops which may be filled with Linux such as Ubuntu). But, Windows will soon the mobile market as well with Windows RT for tablet and Windows Mobile Phone. Apple already has its own Mac OS X and iOS. Google has Android, and yes, PC OS of Chromium OS. But, its Chromium OS is not on par with its rival, namely Windows 8, OS Lion and Ubuntu in terms of functionality of content creation and games. Android, for the game functionality, is closer to the three PC OS. That is why I wrote that Android should be developed as a mobile PC OS (since Chromium OS is not used in PC anyway, only laptops). Google has made 3D modelling software before, the 3D SketchUp (though now no longer owned by Google). It could either develop its own content creation software or hold hands with Adobe, Autodesk, Unity and the likes, or independent developers.
To extend this motion even more, Samsung with its creativity makes Android much more powerful in Galaxy Note 10.1. Yes. This is what Google may do. Make a tablet laptop hybrid (like upcoming Windows RT devices) that has a stylus. Why? Because this functionality can't be found easily in Windows devices (don't talk about Macbook here). It could dominate the mobile world with equal-to-Windows OS with extra functionality and portability (I believe Android tablets are thin and easier to carry rather than laptops. Not sure about the coming Windows tablets, though). Well, I am just a commoner, so probably Android will still be smartphone and tablet OS. But yeah, universal OS for smartphone, tablet and laptop (with each having optimized UI for itself and different capability like some apps are restricted for laptop only) added with unified data across them or lightning fast data transfer might be in the near future. Now, sit back and watch as Samsung probably sues back Apple for copying Galaxy Tab design. Or Apple starts suing Samsung for "copying" iPad Mini design.