This article at Eurogamer does a great job at pointing out weaknesses in the concept of OnLive. I like the smell of the scientific method in the morning (well, midnight…).
The guy’s strongest argument I think is that if they indeed managed the necessary technological breakthroughs, why do they bother with video games? That video compression thingy alone would be worth a stellar amount of money for the military or any telecom company.
EDIT: Another article on the topic.