Game pass is a much better mouse trap, for sure.  But, what makes you think that Sony won't try to improve their offering?  

IMO, Gamepass is going to revolutionize the way that games are distributed, in the long run.  So, I expect that everyone else is considering options to compete with it.  I'd like to see an Amazon Channels-like setup:  Subscribe to Gamepass for $10/ month, then have the option to add the Ubisoft Channel, EA Channel, Activision Channel, etc., for an additional fee.  Those channels may have to sell subscriptions in 6 month increments or something, to ensure that people don't sign up for a $5, one month subscription, play the couple games they want, and unsubscribe.  Or, maybe they will have a $5 per month subscription that includes old games, and a $15 per month one that gets new games at launch day.  I dunno exactly how it would work.  But, I can envision it happening, and I hope that it does.  

EA has had success with their subscription service.  MS seems to be having success with theirs.  Sony.... their service isn't as good in many respects, and it is harder to tell if they consider it a success.  But, the momentum appears to be carrying us towards more of this type of thing.  Sony certainly is thinking about how to make it work for them.  

Could be a game changer if true!

You don't see a reason to offer lag-free, quality gaming instead of laggy, low quality gaming? Interesting.

If Sony did this, it would make PS Now instantly worth having for many.

Its not gonna make a difference because the service is too expensive, PS3 games aren't emulated on PS4 and the PS4 games on the service is underwhelming.

Hmm. Would’ve been something smart to announce at E3 if true. Time will tell.

I was operating under the assumption that they'd put it at a competitive price and give it a competitive library. 

100$ a year seems pretty competitive in my book, especially if we'd indeed talk about no input lag. the library is ever growing too, so it's only going to keep improving

I still believe this is just a mistake, PS Now has been "offering" game downloads for ages, some games just appear in the download list after playing but produce an error message if selected. Downloading games seems to fracture the PS Now userbase, PS Now could not offer game downloads of PS3 games on PS4 or any games on PC.

PS Now is full of odd things like this, for example it closed service on PS3, Vita and other platforms last august but it actually still works on PS3 but only via certain PS Store links for specific games. I could almost believe that this download option is a relic from the time that only PS3 games were on there and this would have allowed downloads on PS3 only. Alpha Protocol is an old game from this era of PS Now.

I can't verify how commonly this option appears since it doesn't show up on the UK service and I don't fancy paying for a month of US service right now but since other people in the US don't see it in every game I have to wonder if shows up randomly (lots of things on PS Now seem to affect certain users but not others).

It could be that they've cracked PS3 emulation on PS5 and are planning this for then. As well as getting games like Alpha Protocol onto the PS Store since it is currently disk only (at least in the UK) I find this scenario hard to believe and it would still leave PC users with an inferior version of the service, which might be their goal I suppose to drive people to a PS console to subscribe, try out some games and then buy some games. I just can't see this being possible on PS4 though.

PS Now and Xbox Game Pass both need to introduce each other's features, streaming and downloads on the same service is better than one or the other since they both have their own strengths and weaknesses. Even given downloads I would mostly opt for streaming since my internet connection can handle it no problem and I prefer the speed of access and no storage requirements that streaming offers. Though for visual quality and people who can't stream games the downloads are a better option.

Xbox has downloads and is looking at streaming, I have to expect Sony is looking at downloads to compliment it's streaming options too but I don't think we'll see PS3 games downloading on a PS4/PC.

I'm still not sure how they'll accomplish this unless they've finally made an emulator, but I'm resubbing for a year if it happens.

If they really are going for downloads then it'll be the PS4 games only (and PS2 since they are the PS4 versions anyway). The reason it would show up on a PS3 game like this would be that they haven't finished implementing the feature and it currently just shows up on any title (although it's not supposed to be seen at all by users yet) that's the only way I could feasibly see them allowing downloads right now.