Though it deserves high marks as a toy, as something to learn how to really play on, it suffers from several sins, and I wouldn't recommend it as a way to learn.
- Focuses the attention on your hands, exactly the wrong place, as you point out. (For the non-guitar players: looking at your hands while you play is like looking at your fingers while you type. If you do that, you will never be able to type quickly. Or play proficiently.)
- Teaches TAB notation, which is an inferior way to model music (no markup for timing, keys, phrasing, or expression, and is usable only if the musician knows the song in advance, and is using a guitar.) TAB is very limiting, I'm exceedingly sorry to see it being so widely adopted. Musicians who learn how to read real music scores can reproduce any song, on sight, in real time, whether they've heard it before, or not. And yes, there is even a notation in traditional scores for showing guitar players which fingers to use.
- Teaches nothing about how to work with a stringed instrument, the strings are just for show. Pressing a button is not the same thing as holding down a string.