It is most visible in a giant TreeView. The best example of one is the left panel in Regedit.exe. Expand HKCR and start typing to see the effect.
The implementation has changed across Windows versions, it used to be a lot less usable in XP. It is a UI blooper, there isn't any good way for the user to see that he mistyped a letter, to correct a typing mistake or to see that a search starts from scratch. Current versions of Windows use a timeout, automatically resetting the partially typed search phrase when you don't hit a key for a couple of seconds. Which is about as practical as it gets. It is certainly useful, just not very usable.
The only sane thing to do with TVN_KEYDOWN is nothing. Never add more ways to make it less predictable than it already is. Intentionally swallowing a keystroke of course makes it a lot less usable if it is a key the user really wanted to use. You certainly don't want to swallow a space, that's of course a valid character in tree node text. If the tree happens to not have any nodes with text that contains a space then you still don't want to swallow it, the control itself already does.
The notification would have been a lot more useful if it also passed the incremental search string that was collected or give a way to reset it. It just doesn't so that's water under the bridge. Consider handling it if you've created some kind of usability trap, very hard to come up with a practical example of one. You know it when you see it.
The only real use is to completely replace the search function. You'd then make your own rules and select a node yourself. And of course always return a non-zero value.