Why are hundreds of thousands keys a reasonable amount for a developer? I am not in the video game business so I fail to see the use case.
Yeah, you need a much smaller number for e.g. giving access to journalists/media pre-release. But the key mechanism is also used for any legitimate sales or giveaways that happen outside the Steam platform.
If you buy a Humble Bundle, you get a set of Steam keys for the games in the bundle. If Intel/AMD/Nvidia are doing a promotion for a free game with a purchase of their product, they give you Steam keys. Etc.
Developers can sell those keys outside of Steam and they are redeemable for a copy of the game on your Steam library.
How keys are used explained in other answers already. Number of keys you can request would obviously depend on how successful is your hame on Steam. E.g I doubt Valve would generate 100,000 keys for a game with zero sales, but likely under 10,000 is possible.
Other than selling keys they can also be used for marketing. If you for instance have a game with multiplayer, lots of DLCs or IAP then giving away keys for base game make a lot of sense: even if only 1% of people who grab the key gonna play it they can still eventually buy other copy for a friend, etc.