Why is custom hardware needed?
It's not. The off-the-shelf hardware they chose, combined with off-the-shelf software they chose, was quite capable of doing what he said it would.
The problem was he lied when he said it was custom hardware developed through a series of different iterations. It wasn't - it was as off-the-shelf as you can get, with only a "would you like fries with that?" ROM upgrade from 8meg to 16meg, and a lack of USB port - to differentiate it from the Alibaba $20 special. Right down to the case, which he also claimed was custom-designed by him...
(Hell, after people showed him pictures of an identical board in an identical case being sold there, he popped up saying the USB port was a 'fantastic idea' and that he'd now decided to include one too...)
The images of the hardware and development process used on the Kickstarter page? Again, deceptive - the picture of his 'custom-made' case was lifted from Alibaba and the original logo (badly) photoshopped out; images labelled as showing how ongoing development had shrunk the size of the hardware showed exactly the same photo (copied from elsewhere too) of exactly the same board simply resized to make it appear as though it was smaller , etc, etc.
Software? Very similar story. His 'custom-made code' consisted simply of a bunch of rules; the
The issue was never that he was taking a $20 box, installing Linux, and asking $50 for it. That's just capitalism. The issue was that he misrepresented what he was doing as original hardware and software development, lied blatently about it, and then when caught out doubling-down on the lies .
His Reddit AMA is a good overview of the whole thing.