The idea is nice, and can work for startups and small companies. However, the companies that interview several hundred people every month (think Google Microsoft, etc.), I am not so sure if this would work.
One way this would work in large companies is if they give the hiring power to individual teams/groups, and then those teams can conduct interviews like this on need to hire basis. But this would require a major shift in how hiring is done in large companies these days.
Actually, it probably scales better, if structured a bit differently.
1) Phone screen (1 hr)
2) Give them a project to work on over a weekend(0 hrs)
3) Have someone go through the code (1 hr)
4) Bring them in for lunch, and then a demo session with Q&A (1 hr for lunch and 1 hr for Demo/Q&A x 2 engineers)
This seems like it would scale much better. The person who reads the code can say yay or nay to the demo session, and then whoever is involved in the demo session (probably 2 engineers) can ask questions throughout the demo. Total time would be 5 hrs and I think you would get a much better feel for the candidate afterwards.
One way this would work in large companies is if they give the hiring power to individual teams/groups, and then those teams can conduct interviews like this on need to hire basis. But this would require a major shift in how hiring is done in large companies these days.