I second/third/fourth the opinion to keep it to yourself. If he was the kind of friend you could easily say "you suck" to, you wouldn't be asking for help.
In fact, don't just "keep it to yourself."
Drop it.
Forget about it. Leave your friend to his blissful ignorance and be happy with the fact that he's happy.
However, it sounds like *your* own personal problem. For example:
You say you *hate* that he does nothing about it. Why do you care? If he's having fun and is proud of his stuff, more power to him. In fact, the topic of this thread is "How to tell an old friend that they suck," not "how do you offer constructive advice." The first implies YOU are annoyed with your friend. The second implies you want to help him.
If he is genuinely asking for help. Listen to an entire song and give him ONE tip. If his guitar is out of tune, tell him, "It sounds like your guitar is out of tune." Simple.
If it is out of tune on the next song, tell him "It still sounds like your guitar is out of tune."
If it is the fact that you are annoyed with his songs, get an attitude adjustment.
Simple.