There has been much trumpeting of the Sony purchase of GaiKai as the great coming of remote game playing (called "cloud gaming" among the over-hyped press.)
The thing is, GaiKai isn't a "cloud gaming service." Why did Sony buy GaiKai and not OnLive? I want to suggest to you that it is because they don't want a could gaming service. They want something else, something GaiKai very cleverly foresaw.
Onlive is a cloud gaming service. Their value proposition is to compete head on with local gameplay.
The problem is, they really cant. All the economics are against it. You still need the computer that used to be on the player's desk, they just moved it to the machine room. No expense saved there. Add to that you still need a thin client at the user's end and you have additional hardware expense plus the cost of the bandwidth to transmit the data.
So, OnLive is inherently a more expensive way to play a game. Is it at least a better experience. The answer is no. Serious lag is a reality of any remote play over the internet. MMORPGs and other games designed for that environment use a variety of techniques to hide most of the lag, but these techniques have to be built into the game. This is why MMORPGs are played differently then local twitch games. Onlive is trying to run vanilla games designed for local play remotely and thus can do none of this. Because of bandwidth costs and constraints, the visual quality of an onlive game is also seriously impacted.
(For some good real world measurements, take a look at this article. Keep in mind though that latency is very dependent on your location on the net relative to the host computer.
So, in the end, the value proposition for this "cloud gaming" is more expensive gameplay in inferior quality. It is no wonder it has failed to take off.
But, I started this article by saying GaiKai is not a cloud gaming play, and its not. From the beginning GaiKai positioned themselves not as a replacement for local gaming, but as a way to do live game demos over the internet. The use case of GaiKai is for digital publishers to drive digital sales by solving the one problem with the digital download store-- that you can't touch the product before you buy it.
Microsoft, with XboxLive, and Valve, with Steam, have shown that there is big money in digital distribution. So much so that the biggest traditional publisher in the industry, EA, has launched their own online store and has stated publicly that they expect the business to go all digital eventually.
Sony's entries in this space have been lack-luster. But GaiKai gives them a key differentiator for their next run at it, likely with the PS4.
And this is most likely why Sony bought GaiKai.