Everyone with knowledge about computing can judge where the cloud can be an advantage for gaming and where not. The cloud isn't useful for low-latency tasks, so it won't for example improve the visuals very much. But for certain tasks where latency is of minor concern, it can be helpful. It's just that first of all I don't believe this feature will in practice be very used very much, because using the cloud will cost the developers additional money, while most gamers will hardly even realize the difference.
As soon as you think about what Microsoft is actually doing, you realize that in practise it's actually hardly more than a very clever marketing spin: They're communicating something that would usually appear like a disadvantage (reducing costs) as a tremendous advantage for the customer.
Ask yourself: What is Microsoft actually doing? Currently, they have 15000 dedicated Xbox Live servers. Running these 15000 dedicated servers costs Microsoft quite a lot of money. On the other hand, Microsoft also already has 300000 Windows Azure servers that have lots of remaining capacity. So from Microsoft's point of view, they're simply moving Xbox Live from dedicated servers to the underutilized Windows Azure servers and save the money for running 15000 dedicated XBL servers.
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