How good does it have to be?
It has to be good enough to hold a tune reliably and play at least reasonably evenly. Everything has to work - pedals and all. It also has to look good enough/sound good enough that it entices kids to want to play it.
Mostly though, it has to fit the family budget or no one will ever learn to play the piano at all. It is all well and good to start a kid out playing a $5000+ piano if the family has the $ (and the determination to "gamble" this sort of cash), but if the only pianos worth starting on are $5000+, then most families are not going to give their kids a shot at the piano at all.
This is my defense of the Landfill Piano, and I have expanded my defense to include such pianos as Baldwin Acrosonics and Kimball spinets. None of these pianos will pass muster with pianists of even middling ability, but without them there will be darned few that ever reach even that level of proficiency. Keyboards can help, but there is something about an acoustic piano that will hook a kid like no electronic piano ever will.
Hook 'em on the cheap stuff while they're young, and when they develop a taste for the good stuff they'll find a way to get it.
It's a marketing plan that has withstood the test of time.
Defender of the Landfill Piano