The lag, oh god the lag. Once the server receives data (if you’re playing online) it has to then forward it to you, which then you respond to and forward it back to the server, which then forwards it to wherever you’re playing. You’re talking about a quadruple jump in latency. Double simply to respond. If you’re cruising along at 20ms that is a lot less noticeable, but chances are people aren’t. Basic input just to move your character is very noticeable.
Video quality.
Number one reason it was stillborn is bandwidth caps. Getting a 1080p experience you’re streaming every time you play a game (for some people 8 hours a day), that’ll eat your bandwidth cap in a few days. This is something no amount of technology will get around as it’s a fixed part of the market. Unless Onlive builds their own infrastructure, a-lah google, no amount of cash injection will fix this.
The best thing Onlive could’ve done was build a bunch of micro-datacenters instead of one big data center in TX or where ever it’s cheap. Pretty much one per state, so the games have low latencies to onlive, onlive lowers it’s bandwidth costs, and possibly even link onlive centers for extremely fast play. Of course they would’ve done this if they were smart. Possibly even rolling out a ‘extreme’ package to local gamers in the form of fiber lines bring latency down below 10ms for even online gaming.
Honestly though, the disconnect between when you push a button and when the screen reacts is huge. I personally would never want to play cloud gaming unless we’re talking about 1ms response time.