With the claims being made, frankly, yes.
The point here is that we are supposed to believe the following:
Firstly, that OnLive has revolutionised video encoding. Fine, OK. They've bettered the best that Sony, Panasonic and Microsoft have achieved in the field of video compression, and they're keeping this incredible innovation to themselves for the purposes of streaming video gameplay. Fine. No problem.
Secondly, that they've come up with a system of beating latency that has so far eluded the very best experts in the field for years.
And finally, that they can somehow pay for thousand upon thousand (millions even) of high-end PCs. And not only that, but they're running proprietary video encoders in each one of these units that out-perform the $50,000 realtime h264 encoders used for live HD broadcasts, encoding with just 1ms of latency (!!).
I want to believe in OnLive because as a gamer I think that the things it is supposed to do are hugely exciting. Plus, I work in video day-in, day-out and this is the most amazing use of video ever seen.
But the bottom line is that at some point you need to factor in Occam's Razor. The more you look at it, the more improbable the whole thing becomes.
But if you look above you can see that it aparently works, unless its a giant mockup. My wild guess would be that they are encoding each frame instead. I played around with JPG and i can get a ugly blocky picture that takes up 12kb, they have 7.5KB or so pr frame.