Ha! I talk about the possibility of such technology in a
thread a year and a half ago. Everyone back then thought the idea was dumb. True that I only mentioned on-demand remote gaming in passing, but the technology involved is the same.
I think a system like OnLive only makes sense if there's the option to stream from a local computer. Basically, you have to get the hardcore players to pay much of the hardware cost. Otherwise it isn't viable economically. You won't find enough casual players willing to subsidize those who play all day.
Here's how I imagine it'd work:
1. You see a new game and decide to give it a try. The game instantly start to stream to your set-top box.
2. The video is low-res and jerky, and the lag is annoying, but you like the game enough to want an enhanced experience.
3. You select the option to buy the game. The software checks your computer's hardware to see if it's powerful enough. Then it starts the downloading process.
4. You put up with the laggy slideshow for a bit longer. After a couple hours, the game is downloaded and can be rendered locally instead.
Getting back to my original point, I think the only platform flexible enough to do this is the PC. Software-wise, it makes sense. On the server-side, it's most economical to go the x86 route. On the client-side, the PC is omnipresent and gamers have demonstrated already their willingness to pay a lot for extra quality.