Personally I'd like to see a more developer oriented tablet approach from google, something like what happened with G+ on the social network scene. Take a little more risk for the hardcore users, because if you're targeting the casual user you already lost to the Ipad.
There's a huge untapped market of casual users that are too price sensitive to be buying the iPad. That's very likely the market a $100-250 tablet would be aimed at. This is the same market that the kindle fire is already selling to. In the case of the fire the hardware is mediocre and I would expect the same from whatever this device is supposed to be.
There's also a market that considers the 10" form factor uncomfortably large.
Personally I think Apple is going to come to regret refusing to cater to users that want a phone bigger than the iPhone or a tablet smaller than the iPad.
I would agree that there's a huge market for a smaller than 10" tablets and the iPad specifically.
I'm not a big fan of the Kindle Fire (I own one) or the Blackberry playbook. The 7" size is great for reading books but the weight is too heavy for prolonged use in many sitting positions considering the size. I would expect the smaller devices to be much lighter than they are.
