Welcome to the world of handhelds, where small keyboards are everywhere (and although not as efficient as laptop ones, which are in turn less efficient than desktop ones, they still get the job done). Go look at a Nokia N810. Even better, look at the iPhone and its onscreen keyboard, that people seem to tolerate. Or any number of texting devices or UMPCs. Even cellphones are used to (clumsily) enter messages, and people do it all the time.
Pandora has a keyboard mainly to assist in web browsing, chatting, and for emulating old computers (think about it for a minute, if you just need to press a key to enter a menu or start the game then wouldn't you want a keyboard there for that, as opposed to having to pull one up on the screen?).
The form factor is also locked at this point, and no amount of "logic" will change that. Several mockups have been sent out which show exactly what dimensions it'll have and where everything will be placed. It's only slightly larger than a DS or a GP2X. Relatively small size is an important design goal for the team.
See for yourself: http://youtube.com/watch?v=AwPb_vunkQY
Here's another one that has a bunch of size comparisons, and you can see that it's very similar to the size of a GP2X:
http://youtube.com/watch?v=alP_l62wPsU
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