No need to compete
Jobs doesn't need to compete with that thing. All he needs is a usable tablet with some compelling content, which by all accounts he will have at launch. Ballmers toy is an embarrassment, judging by the share prices of both M$ and HP, obviously cobbled together over the Christmas break. It's not even an effective spoiler tactic, which was almost certainly the intention.
You can't just throw a touch-botched version of Windows on a screen and expect to define some new kind of market segment, you need a new UI suited to the device - like Apple did and will do - not a screen with a bloated OS on it. How are you supposed to use those tiny Windows controls on that thing? Answer - you don't, you make new ones. Fail.
The only tablets Ballmer should worry about are weight loss tablets.