Android tablets did alright in 2011, but certainly not as well as many of us expected, including Google. So Google has decided to take matters into their own hands and launch their own tablet – a $199 7" tablet that's meant to compete with the Kindle Fire from Amazon. At least that's what the rumors say.
The goal with this Google Play tablet would be to get it in as many hands as possible, and increase Android's tablet market share. That would also attract more developers and convince them to build Android apps for tablets, although I'm not entirely sure that a 7" tablet is the most suited for that. A 7" is still mostly a large phone, and it doesn't necessarily warrant applications to have their own UI, because the smartphone UI of the app would work pretty well as well.
Of course, Google doesn't really see this as an issue, because they think Android apps are Android apps, regardless of the device size. I don't think that's usually the case, but I believe they are trying to say that most apps (say 70-80% of them) should work just fine, even UI wise, on a tablet, and those that don't look that good on a tablet, can easily some modifications with the help of "fragments", to make the apps look more optimized for the tablet.
Google will most likely showcase this tablet at Google I/O this year, along with the next major version of Android, JellyBean, or Android 5.0. I expect the hardware for the tablet to be very competitive with other similar offerings by then, and certainly better than the current Kindle Fire.
Correction: The name Google Play has replaced the android market in terms of name, stay tuned for rumored name details on this tablet in the future.