If I understand this correctly, the unassuming image/jpeg/png/gif/pixel is embedded in the email, it's the same color as the background so the user wont notice it. The image itself which has a unique link for each recipient, is hosted in the senders servers, so when they receive the request for the image, they read the HTTP headers for information such as IP address for location, depending on how many requests they get they can count the number of times the email is opened etc

Right. I somehow interpreted it to mean a pixel in an existing image on the email, not some random pixel image.

Which makes me wonder why they don't just embed normal images that the user would see, but add something to the href that the server can interpret as a unique id. Either way, email clients that block images will break the technique.

There are certainly companies doing this already. The only advantage of a tracking pixel is if your email content doesn't have any images already. And I guess it sounds scarier for a headline.