For one, they never said 5Tflops and they never said infinite worlds as far as I know. We should all be quite familiar with PR at this point anyway. Pretty much every company in the gaming world has been guilty of overselling things and "massaging" numbers. That doesn't mean there isn't any truth to the idea. It could be vaporware. It could be useful. It's way too early to judge.
As far as infrastructure goes, I honestly don't believe it's nearly as big a problem as some people are making it out to be. In a world where we have telecommuting, Amazon Web Services, vmware cloud computing, Oracle cloud computing etc, I'm supposed to believe the Internet is basically not reliable enough for them to be meaningful business decisions. If it's true the infrastructure isn't there, then why isn't anyone complaining about Gaikai being a pipe dream? How are they going to provide a PS3 worth of power for every user, to provide their backwards compatibility solution, when the Internet is just coming it its own. What if I live in a remote village in the Mountains? No backwards compatibility for me? No streaming demos for me? Who is going to pay for the resources and the bandwidth?
The idea of having a client that connects to a giant web application that processes data is not exactly science fiction. We do it all the itme. The difference with games is you have real-time requirements, which is not an issue when you're writing custom queries at home to pull data out of a massive database. A game server is basically a cloud service. I don't see why it couldn't be seen that way, even though they existed long before the cloud buzzword showed up. So what does a game server become if it can talk to all of the other game servers, and to other web services?
Microsoft's infrastructure is building up. They have 8 large data centers worldwide and more coming. That is something publishers and developers cannot do for themselves. Without relying on AWS, cloud services would not be available to game developers in a meaningful way. We'll see how the monetary side of things works out.
I'm not particularly interested in how many flops are available in the cloud that are dedicated to one user, or how much bandwidth. Look at Demons' Souls. That is a single-player game augmented with multiplayer data. Now imagine the service running the game is much much bigger and much much smarter. What can be done with that? We're talking about an infrastructure that cannot be built by a developer, or even a publisher. Yeah, it isn't free, but EA doesn't have its own data centers. When you play EA Sports games online, the "EA Servers" are rented from a third party.