...they'd have made a small low res handheld system with a built in web connection like the Kindle, the naturally low resolution combined with the comparatively high connection speed (Compared to the resolution) would be perfect for playing current gen console games on the go. Maybe the idea isn't perfect, but it's a much better niche than going after people who are too cheap or too poor to afford a decent gaming computer or a console by offering a subscription service before the technology is there to support it.
One of the great arguments of the digital age has been over the effects of video games on aggression — especially if you have ever heard the name Jack Thompson. A recent study suggest the counterpoint once again, that violent video games really don't have that much impact. "The authors performed six studies in total, but they were in broad agreement, so we'll only discuss the more compelling ones here. For the experimental portion, these involved playing an essentially identical game with different degrees of violent content. One group of participants was randomly assigned to play the game House of the Dead 3 on the different extremes of its gore settings, while a second was split between those who played the normal version of Half-Life 2, and a those who played a modified version that turned the adventure into an elaborate game of tag. In both cases, the primary influences on enjoyment were the sense of competence and satisfaction, along with the immersive nature of the game. Generally, females rated immersion as more important, while males went for competence (and consistently rated their own expertise very highly). Violence didn't register when it came to enjoyment, even for those with pre-existing violent tendencies."
One practical use for this would be to run staggeringly complex real-time physics calculations in real time. One example would be doing the necessary calculations to render a physically realistic sea with weather conditions into an animation. You could then send this to users in a sea MMO for example. There are many other cool game related things you could do with it, rather than wastefully rendering some uncanny valley mobile phone game at 2 FPS.
I think it's a fairly interesting situation but you're probably right, nothing is likely to come of it even if it were repeated in other cases with different games/companies/media.