I think the bigger hit to Microsoft, or just as big, is the free and much improved iWorks. Now there are 2 office suites from 2 big companies being offered for free (Docs and iWorks), which are becoming increasingly more popular not just with consumers, but a lot of enterprise customers, too.
Microsoft should be terrified. Both of their cash cows are getting rapidly commoditized.
I would think iWorks is targeting the same market ClarisWorks did from 1984 until the 90s. [1]
It's the same reason iOS is coming into corporate environments: people want to use it.
iWorks is never going to be a threat to Microsoft in corporate environments, really. But the fact that Apple's customers don't need Microsoft at all just as Microsoft is taking a big step into consumer devices is probably an issue.
Microsoft should be terrified. Both of their cash cows are getting rapidly commoditized.