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I don't think it's likely Onlive will be more than a fad. I've seen it and while it delivers more than I was expecting technically, it does so with so many concessions it simply makes more sense just to buy a console. It's a bit too laggy to use for twitch gaming, as others have alluded to. There's a difference between having a high ping where your actions might not be registered as quickly on a server, but the lag effect is of course doubled and far more jarring from a UX perspective when applied to your input.
But the big fail is simply that the end result looks like yesterday's technology, even on a cheap 720p screen. The compression washes out the picture, and it seems OnLive turn down the detail to stop games eating up too many of their precious cloud resources. If their service takes off they might be able to alleviate the latter, but gamers are already used to 1080p and higher (which requires more than twice the bandwidth) and sharper pictures. And when you have to pay a subscription fee for the service and then an additional charge per title per month, it doesn't make long term sense to have something that gobbles your bandwidth, costs more and plays worse. But hey, we'll leave that to marketing...