I see two uses
The first one allows us to pick the keyboard layout that suits us best. We can use QWERTY, Dvorak, or have the keyboard match the language being used. For instance, if you select the Russian nationalization for your Russian language class, the keyboard automatically changes. Also, when you have caps lock on the letters become capitalized.
The second one is for games. Instead of using letters to control the game the "keyboard" changes to controls specific to the game. Think Star Trek: Starfleet Command.
Speaking of Dvorak, I am surprised the iPhone doesn't have that keyboard available.