Anyway, the reason it DOES have a keyboard is exactly what you just outlined : Its competitors DON'T.
Easy.
Sure. 95% of customers probably want a slimmer device without a keyboard. But Pandora doesn't really have a shot at capturing those customers.
Without a massive many-million dollar (pound?) advertising budget the only people Pandora can reach are the people who aren't satisfied with the big players and are actively looking for something different.
Take me personally as an example, If I didn't want a keyboard I probably would have bought either a PSP or an iTouch and said "Eh. Close enough." The only reason I even know that Pandora exists, is because I wasn't happy with those choices and started searching the Internet for devices that I would like. I wanted a gaming device, that ran linux, was pocketable[sup]*[/sup], and had a usable keyboard. I knew that such a device wouldn't be super-popular, so probably no one would make one. Imagine my surprise when I found Pandora.
(When I was searching for the Device Of My Dreams, I didn't really imagine analog nubs, but I can see now that they're gonna be pretty cool.)
* Some people would argue that Pandora is not pocketable, but I regularly pocket an original DS, so I think I'll be fine with Pandora's pocketability.