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My guess is it came down to two things: form factor and support.
They wanted a thinner, sleeker device so they switched to an internal battery and dropped the card slot, just like Apple does. Sure, microSD slots aren't that big but you can get more integrity on a thinner case if it doesn't have a hole.
Support is expensive and the external card leads to more support contacts. You have people with faulty cards that will likely contact Amazon support over missing data or malfunctioning files before they suspect their cards. You have people who can't be bothered to read the specs and see what kind of card to use and will contact support to find out which one they need. Also, K1 only delivered to the main memory which could fill up fast since there really wasn't much of it. People had to transfer stuff to a memory card or remove it from the Kindle to free up space. This is not difficult but I'm sure many people contacted support when they stopped getting their stuff because they didn't realize that was the issue.
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