I've seen other domains used this way. For instance, check out "us.com". They sell subdomains for their main domain.
As for redirecting the subdomains, it can be done both at the registrar level or the server level. If you are planning to offer the hosting for the subdomains, I would recommend redirecting all (ie - *.xyz.com) to your server and then just configure your web server to handle the various subdomains.
If you are planning on just letting folks point the subdomains to their own server, then you might just want to use the registrar settings/redirect since there is no point in having all their requests go to your server first before going to another server.
Hope this helps.