Guitar Freaks is IIRC the 2nd or 3rd game in the "Bemani" series of music games from Konami (beatmania was first, then I think DDR, then GF). It saw its first arcade release all the way back in 1998 or perhaps early 1999 in Japan and certainly predates Guitar Hero. Guitar Freaks is a similar arrangement to Guitar Hero, but it only uses 3 buttons and does not support some of the more complex gameplay mechanics such as hammer-ons or pull-offs. The charts do tend to make up for the lack of buttons in terms of sheer difficulty by being jaw-droppingly dense. It is not uncommon to see charts that look like a wall of notes without a "high speed" mod to spread things out. Guitar Freaks also has no whammy bar, but it does support switchable "effectors" and lets you "wail" (to quote the "how to play" announcer: "play while aiming the guitar upwards") for bonus points, which I personally think is kinda silly.
1999 also saw the release of DrumMania (known as Percussion Freaks outside Japan). DrumMania is notable for being set up almost exactly like a real drum set, though it only has two toms, a snare, a single cymbal (used as crash/ride), a bass drum on a pedal, and a hi-hat with no pedal. DrumMania and Guitar Freaks could link in the arcade in "Session" mode. This is the earliest instance I'm aware of that "realistic" rhythm music games could be linked for multi-player on dissimilar controls.
There was a USA test release of Guitar Freaks, and at least a couple machines are known to exist (one was at the Gameworks in Chicago, last I checked), but there was no widespread release. I am not aware of DrumMania/Percussion Freaks ever being released in the USA even as a market test. This is likely due to MTV's patent on "Drumscape" (a friend often refers to it as "Drumscrape") in the USA, which was basically a coin operated electronic drum set and didn't really have a "game" component. The patent may still be in effect.
There was also a keyboard (i.e. piano) based game released known as KeyboardMania (Keyboard Heaven outside Japan). It also saw no USA release, but it could be linked to Guitar Freaks AND DrumMania simultaneously in what is often known as "Super Session". I've never seen such a setup, but boy would I love to play one. Up to 5 simultaneous players would be possible: 2 on keyboards, 2 on guitars, and 1 on drum set. One player could also play both sides of KBM simultaneously ("double play") if they preferred.
Guitar Freaks was released for the PS2 way back in the day, for Japan/Asia only, appearing alongside DrumMania. Up through GF 4th/DM 3rd was released (as "Guitadora"), then there was a huge gap. It was possible to have up to three simultaneous players in Guitadora: one on a MIDI drum set (such as a Yamaha DTXPress, upon which the arcade setup is based) and two on guitars: two leads, two bass, or one lead and one bass.
After a huge gap in the release, Konami suddenly decided to start releasing GF/DM for the PS2 again with the arcade "rebirth" (on new system hardware) of GF/DM V again in Japan/Asia only. They then published a back catalog collection of "Greatest Hits" using that engine. This was around the same time Guitar Hero was just showing up on the radar in the USA.
Keyboard Mania saw two home releases (KBM 1st and KBM 2nd/3rd combined) on the PS2, but it was not linkable to GF/DM.
Konami has recently released or will very soon release "Rock Revolution" (named no doubt after their so-far only successful Bemani franchise in the USA: Dance Dance Revolution) in the USA. I haven't looked into it much, but I presume it is basically GF/DM possibly with Karaoke Revolution mixed in (Karaoke Revolution has seen numerous USA and Japan releases, but no arcade releases). I'm sure the controllers will not be compatible with Guitar Hero
[For the record, the Guitar Hero controllers are not compatible with the old-school Guitar Freaks controllers, despite several 3rd party GF controllers featuring 5 buttons - I have no idea why they chose not to make things compatible]
What I'm getting at is that I wouldn't say that Konami necessarily missed the boat. If anything, they got to the docks too early and gave up on waiting. Guitar Freaks does play quite differently from Guitar Hero (though I do not know if Rock Revolution adopts GF or GH style play mechanics), so there is room for both.