Their music is simple and has a nostalgic charm. Zooey is not going to compare to Matt on musical talent--if real-life guitar skills transferred to the videogame world he'd be dominating people on Guitar Hero--but she has a strong, clear voice and that same sweetness that she's showcased on screen. They both have a relaxed, confident stage presence that draws the crowd over to their side.
On the "do they sound better on CD/MP3 or do they sound better live" question, based on this concert it's the latter. M. Ward die-hards may feel a bit short-changed that he doesn't sing as much in this collaboration, but I'm not familiar enough with the oeuvre of M. Ward to know what I missed. Live, their sound is bigger and richer than on CD.