Hmm, I might say it a bit differently. I think the best hypothesis is that the Qur'an, and Islam generally, reflects a multiplicity of influences and sources that have been obscured by the orthodox Heilsgeschichte narratives. Muhammad's movement was just one of those sources, and it may well have been based in Yathrib. But (as with the conquests) Islam has written a history which presented all these developments as if they burst forth from the Arabian prophet, his revelations, and his followers, who conquered the region. The much better explanation, I think, is to see a contested milieu of different groups and factions striving for legitimacy and power -- the prophet's legacy became a weapon in that milieu.
You can see this most clearly in something like Surah 73, which begins with some of the most archaic Qur'anic text -- it seems to be a monk working at night, no less -- and then jumps into an interpolated bit of early apocalyptic, followed by the last verse which is basically much later jihadi propaganda that tries to comment on the much earlier text and make it accord with the ideals of the later movement. I think this is a very good example of what Luling is getting at, one of the most obvious examples.
So I think a great deal of work needs to be done on piecing out what has happened to such texts, not by trying to explain it through prophetic biography, but rather through analyzing factional and ideological shifts in the text (the hajj and qibla change in al-baqarah being a good example). Until much better progress is made in that realm, the reality is that much of early Islamic history will remain little better than legends.
To answer Happymurtad, that is a very good question. Actually it is an important fact that the Meccan surahs virtually all refer to the 'rasul,' and he only becomes 'nabi' in the Medinan surahs, with a couple minor exceptions that appear to be interpolated. This, again, surely reflects a factional shift, a move towards asserting the genealogical inheritance of the Arabs as a distinctive movement with its own Holy Book and Arab Prophet. Traditionally, this is explained by saying Muhammad had risen to political power in Medina. Far more likely, I believe, is that this shift reflects a nascent Arab monotheist community crafting and asserting its own identity in the early conquest milieu, when it had seized power.
https://books.google.com/books?id=wHUsBgAAQBAJ&pg=PA75&lpg=PA75&dq=rasul+nabi+meccan+medinan&source=bl&ots=9IazZT9Tyc&sig=CARW0FOVBKcrd31OaiUWABizPTA&hl=en&sa=X&ei=hidSVfKcI871oATHzoC4Cw&ved=0CDUQ6AEwAw#v=onepage&q=rasul%20nabi%20meccan%20medinan&f=false
Topic: what we really know about early Islamic History ?