Looking at the closeup of the neck it looks like there is either a pressure or ground sensing sensor at each string location on each fret. Meaning probably it senses which fret position is being crossed with a string at that time which should be fairly accurate. I would but it at a cost of up to $300-350. Which is reasonable considering a squire strat is about $100-150 and add in the other electronics at another $150 value add brings it to about $300 which is fair. Anything like $400 or more and they wont sell many.
MadCatz is coming out with a MIDI controller so that you can use your MIDI instruments that you already have with the game. http/www.joystiq.com/2010/06/19/rock-band-3-mad-catz-keyboard-and-midi-pro-adapter/ I believe the game also has a tuning setting in there too. Not sure about the pricing yet, all i have heard is that "It's going to be competitive to real intro guitars" I wouldn't be surprised if it was around $50 more then a reg. fender squire strat. It's not just a toy or controller, it's a real instrument. Ive never paid less then $99 for a real guitar