Would this work for city based websites. If you had a sub domain setup for each city and then a menu with a link that said mycity would it automatically go to that subdomain based on there IP address?

I also read that you need a yearly license to operate and two choices to choose from. Is this required and doesn't google offer something like this?

Yes this is effectivelly the idea.
If you create website with cities subdomain and that you also create a generic website, you can redirect the website automatically on the cities website based on the IP address.

You can setup a slave like this:
city.domain.com, www.domain.com
With Geolocalisation = city
Plus redirect on first domain.

So that if somebody goes on www.domain.com from the "city", it will be autoamatically redirected on "city.domain.com"

You have 3 choices for the geo-localisation data.
1 free (MaxMind DB)
2 possible billable services (MaxMind and Quova). This is a webservie. That mean that JMS post a requestion on their websites to get the answer concerning the geo-localisation. For that, you need to buy their license.