Hardware seems to get cheaper/better faster than networks do. Also the trend in networking is bigger bands not lower latency. Someday cloud based low latency apps will work, but I doubt this will happen anytime soon.
The real news here is that compression card they have created. The article doesn't go into detail but large scale 1ms compression?!
What it would take to make this work:
A unified, or at least more unified internet topology. Latency occurs at the gateways/modems/MUXes where you are translating from one type of packet to another. Perhaps you could get around enough of that with peering... hmmm Ultimately I just don't see a lot of applications requiring this kind of latency so OnLive will be swimming upstream.