This is an old idea, I remember it from many years ago when they wanted the same thing. Never succeeded though. Back then (10 years..??) it was precisely the same reason as nowadays, upgrading your pc can be very costly, why not make things "more centralized". I don't give them much chance this time either.
EA has Battlefield Heroes MMO coming out pretty soon and they have produced it with a step back in graphic requirements that makes it accessible to the highest common denominator. I think a lot of the developers have realized that PC games and Console games don't have to have the best graphics possible to still be a fun game. The Wii is the most popular console but is the worst as far as graphics. Many people, myself included, have not moved past the PS2 to the next generation. I'm sure the economic downturn as contributed to developers taking a step back to. This falls right in line with what Onlive is doing because the pixel setting is relatively low. But I would imagine that in the future that Onlive would be able to increase the pixels, or a least make it appear that way, similar to what Slingbox was able to do over the last few years.
ISP companies have constantly been able to push bandwidth up and it doesn't appear to be ending any time soon. The real issue is "lag" and Onlive have supposedly developed new proprietary compression software, as mentioned in the links above, that over comes the "lag". If this is true, I would think Onlive stand to make a lot of money alone, licensing the software to MMO companies and others. This software would also make it easier to develop an MMO because they wouldn't have to worry about the game being compatible on all different kinds of systems at least on some level.
As I mentioned above the most promising aspect about Onlive are the many game companies that are behind the service. They have obviously been shown a lot more than we have and what they were shown appears to have convinced them that this will work.
Lets hope this is not just some massive scam!