Yeah, this idea is basically about taking Guitar Hero experiences out of the videogame business model, and into the karaoke business model.
I wonder though, shouldn't the "player" be separate? If there was still a small, cheap, stand-alone console unit, it could basically be a glorified CD player with some chips in it for the standardized graphics and doing the limited game logic. Then the guitars or other instruments could be seperate units, much easier to replace if they broke. AND the tracks could be printed on cheap CD... well... actually... no... you probably don't want them on CD due to piracy...