JR-
The typical way we drive our air bearing spindles is with a frameless (no bearings) brushless DC motor. The air bearings are the bearings for the motor. The motor itself comes as a "kit", a rotor with magnets, and a stator with the windings. The encoders vary in design, but are also non-contact. By skewing the laminated steel windings of the motor coil, you can almost eliminate the cogging caused by the magnetic attraction. There are also some elaborate ironless motors out there which have zero cogging, and are non-contacting.
As far as this technology being practical for typical machining, there are several companies out there making machine tools with this technology. I used to work at one,
www.precitech.com and they make many types of maching centers, usually custom designed, or for applications where extreme accuracy is required.
NEATman