Something I've noticed about the Steam controller is not very many gamers understand why it has trackpads (well, maybe more people are getting it lately) and why this may be superior in some use cases, so here's a simple breakdown of my thoughts:
Character movement — With keyboard and mouse in some games, especially in shooters, you are given eight inputs for character movement, W, A, S, D, W+A, A+S, S+D and D+W. You can say the inputs multiply with the crouch and sprint keys, so you have eight directions of character movement and three movement speeds. Compared to analog stick controllers, that's still not a lot for classic style shooters, though it's adequate. You can jog, run and crawl along two axis. It's good enough. I don't know how many fine grain inputs an analog stick controller grants you, but I don't have to explain how fine character movement is with an analog stick. In my personal opinion, analog sticks are usually superior for character movement except for in use cases such as platformers, fighters and in Quake II style games. BUT analog stick controllers have a downside…
Aim — Analog stick controllers are obviously not ideal but are workable where a cursor or aim reticle are used. This can be subjective as some people have a hard time adapting away from analog stick aiming, but I digress. We all know analog sticks aim are based on the amount of lean for camera rotation/cursor movement and timing its release. It's not ideal for fine grain aiming and auto aim becomes a common feature for console first person and third person shooters as a consequence.
What may have dawned upon Valve is that smartphone shooters like Dead Trigger have the fine grain character movement of consoles and the fine aiming of PC, but smartphones are very unwieldy because they are not meant to be game controllers (no ergonomics and no wide array of hardware buttons). Not to mention you can lose track of where your thumbs are relative to the smartphone screen because of its flat surface, causing players to occasionally move in undesired directions. The Steam controller borrows from smartphone shooter controls, adds ergonomics, hardware buttons dedicated to gaming and puts concave trackpads with circular ridges in place of the non-tactile glass surface. Valve's aim was to allow both M+K and console controls to work on their controller, because not all PC games feature console controller support. The end result is taking more PC titles to the big TV and couch, which was Valve's goal all along. The positive side effect is the two finer controls of movement and aim are brought together in an actual controller.
I don't know if the trackpads will solve the problem of forgetting where your thumb is for character movement as I have not had the opportunity to use the Steam controller myself, but there is an analog stick in the more recent mockup design the public had seen (same image as above), so even if there is a problem, you can fall back to having an analog stick where you can most certainly feel the angle and strength of your thumb against it and the right trackpad is still there for aiming.
Side note: I hope a D-pad makes it in the official release or the left trackpad does a great job of emulating one.
So, long story short, the Steam controller was dreamt up to bring PC games to the couch with trackpads, bringing together the best of mouse and keyboard as best as possible. It is not expected to be a perfect replacement for mouse and keyboard, but for a number of PC games, it may do the job quite nicely.
Also, it just might do one better over analog stick controllers and I think that fact alone should be enough to not fuss over it? Well, people are still fussing, so I took a stab at explaining a few reasons why Valve is making such a unique controller. Article taken from GamingOnLinux.com.
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The fact that you have to use your thumb (and only your thumb) with a controller like this is going to limit how precise it will be in comparison to a regular mouse where I can use a number of fingers, my wrist, my arm and my palm to direct aim.
Don't get me wrong, for couch gaming this is likely going to be a fair amount better. But it's unlikely to move past casual gaming (not causal games).
if you dont know what a trackball is:
EDIT: Ah, sorry, only one trackball. Check out a picture of some of their prototype desings for an idea on the progression: 
In HL2 all you have to do is point in the direction where you want to go with the mouse and go forward with "w".
The trackpad is there to help you turnaround as fast as a mouse. Not as fast but better than an analog stick. This is what I noticed from the videos I've seen. It's much faster than behing limited to the maximum speed of the stick that gets you shot 2 or 3 times while doing a 180° turnaround.
You are totally right but K&M is not really convenient for a "couch experience". This is why they came up with this controller. From what I've seen, it's going to be far better than a XBox controller, IMO.
This said, I would have gladly tried the Steam controller on games like The Witcher 2 and Trine 2. Sometimes in these games, the keyboard can be really difficult to handle.
The reason was that they would be a nightmare to clean, and that they are quite heavy (which is fine if it's on a desk, but not so good if its in your hands). The cleaning thing makes sense, given that the whole experience is meant to be easy and they can't expect people to take out the ball and remove dead skin, bits of nachos, etc. Otherwise it would have been preferable.
I do get the controller, it looks promising, but its understandable why they're taking so long over it - it needs to be just right since it's the main selling point of the Steam Machine. The trackpads do worry me a bit, they will probably work on some games better than others, but then again that's probably why they decided to include a joystick.
well seeing how all those hardware manufacturers are super eager to release steamboxes already, publishing them as "steambox ready" after Valve delayed releases due to controller design not beeing complete (alienware alpha, gigabyte brix, zotac zbox en760 to name some). i bet theres mores than enough will and financial power available within the group of hardware partners to actually build those controllers. even more so because shipping both the SteamOS and the Controller are the 2 restrictions to name the pc "steambox".
i think we must not underestimate the potential this thing has for the pc hardware industrie. with so much competition going on they cannot simply skip the chance to increase their customerbase by getting a chunk of marketshare from the console playerbase. their risks are relativly small (aside from the shell every steambox can be rebranded as minipc) compared to the chances. the controller can still be sold even when steamboxes would fail (given they work better for certain games than console controllers, hence the extra worktime on those) and even the OS wouldnt be a failinvestment by valve since its a nice backup if microsoft is going games4windowslive mode again to screw up their core product (steam).
overall i think its a perfect plan with shared, little risk for every participant but great opportunities. even if it partly fails (like the boxes would only be used for inhouse streaming) hardware vendors would still benefit due to selling more stuff.
One of my long time friends who moved away years ago that I played FPS's with on xbox360, who is damn good with a controller and use to wipe the floor with my virtual dead body recently came out my way for vacation (right near da beach ;) ). I had not seen him in a really long time and was surprise to find out that he had never played a fps on a pc since like doom1 days. I sat him down at my battle station, and he was amazed! Not only had he never seen a 3 screen gaming setup or even know it was possible, he had never "aimed" with a mouse. I loaded up MetroLL and gave him a quick rundown. It took him a few minutes to get the hang of WASD movement and mouse aiming. Once he did he played for about 30 minutes without saying anything.. just in the zone. When he stopped and turned around all he said was "WOW, I never want to play a FPS using a controller against someone using a KBnM". I showed him the prototype steam controller and even he thought that was a way better design than any XBox or PS controller. I wonder if it will be possible to use one on an XBone?
They did say that the left trackpad would also have clicking options in order to be used as a D-pad as well which sounds good to me.
I am actually really excited to try this controller it looks like a fantastic innovation in the controller space.
I think Valve's design is great. I can't wait to get my hands on it.