Latency issues aside. This is one cool concept. Except of course that nothing replaces a real live jamming session. Ahhhhh... reminiscing the days my guitar feedback would annoy my bandmate to no end. This would interface nicely with modern guitars like the Gibson model with an ethernet port. The user interface is GarageBand'ish too, which makes it easy to use.
However, if we bring the latency issues back, it would be hard to make this thing work in real life. What would be more ideal I guess, is a cvs like system with a really cool web frontend for collaborating music. Think open source way of creating music. That would really rock.