This is not your standard FM transmitter, which, you're both correct, are crap. This connects directly to the antenna jack on the back of your car's stereo, and then the antenna plugs into this - as does the source device such as a phone. When you turn it on, it cuts off the signal from the car's antenna and "broadcasts" (not really because there's no actual radio signal) the audio on one of those frequencies over the wire going into your car's radio. The car isn't receiving any other frequencies over the airwaves to interfere, and there's no actual wireless transmission taking place to be stepped on by other stations.
I've used these for satellite radio installs in a few cars, they work quite well. I don't know if it's as good as an AUX input (hard to judge with satellite since audio quality with it is sometimes lacking anyways) but it's not a bad way to add an AUX input without buying a new radio.