First off, a description of MIDI from someone who's used it a lot....
MIDI is actually a networking standard for Musicial Instruments, though it resembles a control language more. It's used to link devices together so they can basically synchronize events....say, you have a drum machine and a sequencer, you can set it up to change the patches on your MIDI compatible guitar pedal at the right point in the song so you don't have to worry about pushing pedals with your feet, or even playing back the whole song through one keyboard while playing certain lines on another. Basically, it's a way of controlling music devices. I use MIDI a lot to control my digital effects devices, and edit patches using the computer (which is a heck of a lot more convenient than tweedling knobs). MIDI can be kind of thought of as a network card for musical instruments, some have it, most don't.
The PC version of the game MAY use a USB to MIDI convertor - this would render one capable of buying something like a USB 1X! interface to play the game with a regular guitar with a MIDI setup in it. However, modifying a guitar to use that requires more than just a simple pickup - there is usually some doodad that attaches with a bracket to your strap button on the bottom to allow you to change parameters for your MIDI compatible guitar synth on the back.
The only guitar I have seen with a MIDI setup inside of it are the early 80's Roland synth guitars like Neil Schon uses, or the Fender MIDI ready Stratocaster they made for awhile.
If they indeed use a converter for MIDI to the proper interface, that may mean the console versions would require a special adapter inside the controller to enable it to be compatible with the console it's being used with, assuming the console does not have a USB port (I don't think the Wii does). MadKatz and the game company itself might be making this deliberate so then one who does desire to play Rock Band with their actual guitar or such would require the purchase of a special adapter that would fit between your guitar's MIDI pickup, and the game console to convert the MIDI commands from the guitar to commands the console can understand for the game.
I can see someone into geekery doing some hacks on this stuff to use it for other purposes, as well as maybe hacking a real guitar to work with the game. However, after getting a closer look at the Squier, it looks like it may work differently than a Roland guitar pickup because it appears there ARE indeed buttons, or at least a pressure sensitive surface on the fretboard that acts as a button (much like my Casio Digital Guitar), rather than reading the strings like a MIDI pickup would do, which leads to 3 final bits...
1.) The controllers use a MIDI to (insert gaming platform here) converter to control the game, which would be the best case for hacks and using real instruments with the game, because it would either require intervening the post MIDI subsystem for use as a MIDI controller, or to play the game would just require an adapter to use a real MIDI capable instrument with the game.
2.) The keyboard has a MIDI in parallel with the controller interface, which means that one would have to build their own MIDI interface for the other controllers, if even possible, possibly rendering use of a regular guitar with the game with a MIDI pickup, useless.
3.) The consoles are capable of MIDI through the standard cable, and the USB is just a USB to MIDI adapter, if this is the case, then a more basic adapter would be required to run a regular guitar with MIDI pickup on the game.
