My daughter actually really did learn the alphabet song from that dang magnet! I had never sung it to her before & after having the toy for a while (she was pretty young when we got it), she could sing the entire song by herself. When she first started to sing the ABCs, I purposely refrained from singing it to her in an attempt to see if she would learn the entire thing from the toy & she did. She has an astounding memory & learns new songs, even from cds, very quickly.
The toy will tell you the long sound and the short sound (long a & short a). That is how we would teach it in person anyway: http://www.phonicsontheweb.com/letter-sounds.php
Fridge Phonics also tells you both "g" sounds. As for the next-step-up version, I found it at the thrift store for only $3.50, so, yeah, dd1 is getting it for Christmas (Thanks, someone else's mil!).
Reading is dd1's favourite activity above all other activities that could ever be invented, so the toy is not her only exposure to letters and language. We do have flash cards that only feature the lower case & we do name upper and lower case letters as such ("big g, little g"). I actually do not really care that the toy goes over phonics. I like it more b/c dd1 likes to find and identify letters. The next one will ask her to do this. In general, we do not keep electronic toys, either. They either go to the attic or the thrift store. They are almost always too loud, too difficult to operate correctly, or too blinky. We have a baby gym, but I took the electronic sun thingie off of it.
My main point was to say that a large part of the joy of unschooling is that you, and more importantly, your child, get to choose the path of learning. Part of this means letting go of what YOU think is worthwhile and embracing what YOUR CHILD thinks is worthwhile.
Some recommended reading: http://justabaldman.blogspot.com/2010/06/values.html