Have you ever played MAG on PS3? The game uses dedicated servers to make 128v128 players virtually lag free.
MAG only sends the most basic functions of the game, player inputs and environment changes, to make sure that the 256 simultaneous players are playing in sync. MAG servers aren't sending the entire video and audio feeds of the game to the player like OnLine is doing. So the comparison of MAG servers to OnLine gets us nowhere because they are completely different animals. And MAG is nowhere near lag free also.
When playing games online you sync peer to peer, or to a dedicated server, and the game is (hopefully) designed to send as little information as possible. The more information that has to be sent (and received) the higher the latency is going to be. The longer the distance is, for information to be sent, the more latency there also will be.
Now look at OnLive. You sit at home, press a few buttons, the inputs must travel all the way to a dedicated server where the actual console is located, then the video and audio feed from that console must go all the way back to your house. How does that possibly make a game playable? Imagine playing Heavy Rain or God of War's quicktime events under those conditions. Impossible. I just don't see how this is a feasible way to play games and have them still be enjoyable.
What would make sense is what SONY, MS, Nintendo, and dozens of PC gaming companies have already done. Just set up a store where there are downloadable games. Charge for a game, have the person download it to his or her console, then play the full game offline right from the console.
Let's look at the Playstation Network and the library of PSONE Classic Titles that can be purchased and downloaded. For example, Metal Gear Solid 1, a game that takes up 700MB of space if you download it to your PS3. If you download the title and play it off of your hardrive you are using 700MB of bandwidth from SONY's PSN server. If you stream a 480i video feed of all of the hours you play the game instead...you are looking at more than 700MB of bandwidth. So what's the point? You are paying to play a game under heavy lag, you are wasting bandwidth, and most likely monopolizing your home internet connection anyways.
If OnLive is anything but a complete and miserable total failure I will be truly astonished.