I doubt it will (currently) beat playing on a local machine. I have concerns that the latency between your input and the onscreen results will be too large, and make you feel disconnected from the game. It's horrible when it happens. I mean, when you see someone in a multiplayer game, that you KNOW you are hitting with bullets, but the latency is just slightly too high, and he is really infront of where you are aiming. Now imagine that, but with just running around. And not only in multiplayer games, but single player as well.
Also, consoles haven't destroyed the PC gaming market. People still buy PCs, and spend lots of money on them to make them super powerful, and just how they want. It's one thing the consoles will never have over the PCs (in their current business model). But I can see OnLive competing with consoles.
Though streaming video has a high bandwidth requirement, and a lot of ISPs have "fair usage" of around 40Gb/month. And if people start playing 4+ hours a day of "high quality" video (even if it is compressed) for a whole month, that's what? Upwards of 120 hours a month of video. Say 2 hours is 700Meg, we'll say 500 for ease of calculation, that's 30,000Meg, which we'll say is 30Gigs. That's getting awful close to the fair usage. What if they use BBC iPlayer as well? Hell, ISPs complain about BBC iPlayer taking too much bandwidth as it is...
SO! Random mumbles aside, I wouldn't pay a big monthly fee for this if I had to pay extra on my internet because I was breaking my fair usage policy. And if everyone in your street is playing at the same time (aka, evenings), then bandwidth on ADSL will drop, QoS drops, etc. And latency is a killer! If it turns out to be cheaper than buying the games, then maybe. But I'm not sure how it can be in the long term... Charge per megabyte, charge per hour, charge monthly fee, charge per game "rental"? All have their down sides for the consumer, if you ask me...
Edit - DAMN YOU BLOKE!