It sounds like that's basically what valve's going for here. It's a mouse for the couch, except that instead of a left-hand keyboard we've got a trackpad. That's ambitious in that they think a trackpad can be used in place of a joystick/WSAD, but Valve's bread-and-butter is FPS games so I don't think they'd go for that if they didn't think it'd work.
Super Mario 64 DS had an interesting feature where you could put your left thumb on the touch screen and use it like a joystick. The neutral zone would be wherever you put your thumb down, and a little diagram would appear on the touch screen showing where the edges, neutral zone, etc., were.
I remember this actually not being too bad. I didn't use it over the D-pad for any precise movement, but part of that was the awkwardness of having to stretch the thumb over the the touch screen. There also was a little thumb pad on the DS strap you had to wear to get it to work smoothly, and that was a little clumsy to use. It was also hard to get a sense of where the neutral zone was, etc., since the only indication was a diagram under your thumb.
It looks like this controller takes that same idea and improves on it. You won't have to stretch your thumb or wear a thumb pad, and the circular trackpad maps better to a joystick than an arbitrary circle somewhere on a touch screen. It also looks like there's ridges on the pad, which could help with getting a sense of where you are.
If it was sort-of viable as a side feature in a nine-year-old game, I'm optimistic about Valve's ability to make it work. As you said, it's not like Valve is unfamiliar with the area.
You have a kinder memory than I. I loathed that game so very much. Part of the problem was I had a DSFat, so that's along-assed way for the left thumb to reach. But it might be less excruciating without the thumbpad. Because seriously, that thing sucked.
That and the bolted-on character switching mechanic combine to make my memories of M64DS less than kind. A shame, I loved it on N64.
But still, I trust Valve to do a better job than that, since they're betting the whole platform on this kind of interface.
