Two controllers appear to be a requirement. Otherwise they would have to have one UI for one player and the other UI (controller/K&M) for the other player.
You can connect two displays and play split screen so that one display is one player. You can also have one screen split vertically (for two players), and there is an option under Gameplay options, that determines whether to force split screen or not. If you choose not, then the game calculates whether the player's position requires split screen and will switch between split screen or one screen depending on how far away you are from each other. It will even zoom out a little before splitting. Very convenient.
One of the players in a multiplayer game is considered the leading/primary player, and unless the screen is split, only he can rotate and zoom the camera. Also, only the leading player can save/load. This was probably the same in DOS, but I haven't played it in multiplayer.
"Two controllers" has to be the problem. I'm pretty sure I saw a video update where they were playing split screen and one was K&M the other was using a controller.