Stepmania Online

So, I'm unsure how the whole "spectate" system works... Does it mean that you can watch others play (similar to Osu, League of Legends, etc.) or does it just mean to opt out of playing a song and chill in the lobby?

Yes unfortunately with the limitation of the stepmania client you aren't able to view other players notes. It is essentially opting out of playing without leaving the room.

It also allows you to play without your scores being recorded.