I think the reason behind AMG was the quality of the data. Most of use have come across metadata from Gracenote that is a little off and sometimes very wrong. For instance, I was re-ripping some CDs to lossless in iTunes yesterday and had Michael Jackson's Dangerous come back with 2/3 of the track names in Japanese! After all, Gracenote data is user-submitted vs professionally maintained by AMG.
That being said, I haven't been all that impressed with AMG either. The hit rate is lower than I would hope for (AMG doesn't like Dave Matthews - I've had 2 of their albums come back unrecognized!). I've also had weird cover art issues where the art that comes back doesn't match the imported album because of version differences, etc. The manual entry process, as Josh says, is tedious and is a departure from the rest of how the system works. I suggested to K that they should have Gracenote as a fallback option if AMG doesn't find an album or retrieve the right album.
One specific problem I've had is unavailability of UPCs. Long ago I started ditching CD cases in favor of sleeves for CD storage. So, if a disc comes up unrecognized, I don't have access to the UPC. I have suggested to K that in addition to the UPC, there be a field for the AMG catalog #. This is a unique indentifier that AMG uses to denote an entry within their database. You can go to AMG's website and look up any album in their database and see it's catalog number.
AMG site homepage
An example of a Dave Matthews Album that the K won't recognize even though it's obviously in the AMG database
Notice on the Dave Matthews example page the catalog numbers appear at the bottom. I could use this and never have to bother with UPCs and know in advance that the album info was ready and available.
Truth be told, I don't use the Music feature all that much. I have several solutions for music (Roku Soundbridge, Sonos, Airport Express, etc) and the K isn't always my first choice. It's a combination of these import hassles, having a huge digital collection that I don't want to re-rip, the K system having a more limiting control interface than other options, etc. I've made various suggestions to improve things and I'm sure they will over time.
Jeff