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While the idea sounds good/okay, it wouldn't be ready for prime time yet. That is, because

a) HQ microphones are not a very usual thing to have and they are not cheap and

b) because lag will probably kill the experience, even with a very good connection, a delay of, say, 150ms will be noticeable when playing music relying on reacting to each other.

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I think any musician that's serious about playing music has at least one decent microphone and some sort of recording setup (M-audio stuff is a low-cost way to get into recording). Hearing yourself play is also invaluable towards learning.

The second issue is real and since I know nothing about how to solve it perhaps the idea is dead in the water for now. But anthonyb's suggestion of recording all the tracks separately and allowing the musicians to mix them in post might be one way of going around this.

Microphones aren't that expensive though - maybe a couple hundred for a semi-decent one and a reasonable sound card? Lots of people would spend that on a guitar.

The latency might be an issue live, but there's no reason that the musicians couldn't (eg.) Lay down drum tracks, bass tracks, etc. and mix them up afterwards.

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