Can Google Docs really replace Microsoft Word?
Agreed. Google wouldn't be able to compete as a replacement without a lot of client-side software dumped onto your computer to make up for the lack of word processing features. I am sure if Google could make Docs monetize out better then you would see a push in that market that would make it an ideal replacement.
Google docs is great, I've used it myself to share a running log of things to do with some friends. However, the automatic formatting I'm used to in Word, the automatic spell correction, etc, isn't there yet in Google docs, so for me, it's a supplement, not a replacement.