Getting back to the OP's original question, asked on behalf of his friend:
"How many instruments can I put on before people will stop thinking of it as a live performance?"
I would say: How many instruments do you think you need to make it sound great? If you're playing Folk music covers, a simple guitar/vocal will do just fine. Conversely, if you're playing Classic Rock covers like we do (Jurassic Rock). I want a big sound. For me, it's all about the sound.
The live music business has changed drastically since we started doing a duo back in '75. Back then, we did a lot of gigs with just a guitar and a bass. Later we added a drum machine ( a horrible-sounding monstrosity I still have!), but it increased our ability to get work. We could market ourselves a lot cheaper than a full band. All of our friends in 4-5 piece bands were going hungry. It was simply a matter of necessity. In all the years we've used tracks, we have never had a patron or a club owner question the use of them. They only care about the sound as well.
This is 2012. We have fantastic technology at our disposal, so why not use it?
As for the 'people' the OP mentions – these 'people' can't even hear the difference between an MP3 and a WAV file, let alone an analog recording on vinyl. Play it fast and loud, make them dance, keep them drinking. Worry about the artistic considerations in your dotage.