"If they are good sites I don’t see why Google should penalize them just because of their domain name"
"If they made a really good site, would the domain name still be a problem? "
---> Google has done this to a good number of 'good sites'.
"a blog would make more sense on their main site because it would attract links."
---> that would not be the reason I'd create a blog.
---> I wouldn't bother using the kw rich domain name if you choose to go with a brand name domain name.
- my name is Andy Kuiper, andykuiper.com ranks #1 for most (and in the top 4 for the rest) SEO related search terms in Edmonton 'and' Calgary Canada. (each city is 1 million+ population). "andykuiper" clearly isn't a commercial kw... I think you might be putting too much emphasis on the kw
* and - just reading the comment posted above, if you add a geo modifier to the KW, you're "unlikely" to have an issue with Google It wouldn't be an EMD, and Google (so far) has been pretty good about not giving a hard time to domain names that contain KW's and 'city name' (as an example) URL's