p.s. The one place where XBLive fails is the actual gaming, lag lag lag lag lag...go figure
That really depends on who you are playing and the network conditions between parties.
I have played a bit with a friend and most of the time lag isn't an issue--and I am pretty sensative to it. It is just like PC gaming--when playing someone from Japan or Europe it is gonna suck most times. When trying to play someone on the opposite coast, it is gonna suck at times. Even with server based PC games I knew server areas I would get a good experience from (e.g. NY & NJ, Chicago, Dallas) and others that stunk (Seattle, Florida, LA). That is due to my location (Ohio) and looking at the 'net backbone diagrams it makes a lot of sense. Likewise server load always makes a big difference, and even assuming no processing bottlenecks, there are still connectivity ones. Having a dude with a whimpy DSL 756/128 connection server a 16 player game has a high propensity to suck.
Even if MS moved completely over to server based model location issues would still be relevant.
Quality is one of the biggest concerns for online gaming in general. Not only in regards to human interaction (noobs, jerks who ruin games, cheaters, foul mouthed players, etc) but also the consistancy of the actual gameplay experience.
This is exactly why MS has developed a host of features to flesh out the online service: Coop (which MS is pushing), Achievements, XBLA, Buddy lists, chat and voice messaging, demos, trailers, and so forth. These are areas MS has much more control on the quality of their end of the service.
Not that online gaming with Live is bad in my experience. My experience has been the opposite and being quite pleased with the general performance of online games with Live considering the fact they are not using a dedicated server/facility model like PC games but allow in many cases for users to host games on their console and with their own local connection. The down side is we won't see many 64+ player games with this model, but my PC experience has been in many games those stink anyhow. And allowing people to serve their own games means more "servers" more often and no reliance on legacy platforms. Meaning you can break out a 3 year old game and not rely on EA or whoever to still be hosting servers for it.
Btw, this would be a good new thread: How much have you played live and what has your experience been in regards to a) features and b) gaming performance. On the later, how does it perform in games with people in your general local geographical area, and outside. Finally, what would you alter and add?
Anyhow, sure you know most of this, but that has been my experience. About all I do is online game as well on the PC and Live has been a pleasant surprise for me in my experiences with it. YMMV