Cloud enables these companies to turn computing into a service they then can rent out and keep making money on.  They are not investing billions in order to make gaming superior, but to make more money.

Technically, cloud power hasn't completely proven itself yet. Sony banked on it first, but Microsoft is very heavily banking on it to become a hit.

http://bit.ly/15eO9ye

This will be done for gaming as well. It is inviteable. You may not like it, but this is the future.
The pay-$60-once-and-play-forever business will still be there, but games as a service is coming. Just like computing as a service is here to stay.

The games I mentioned require an internet connection and they did very well.
It doesn't matter if they require an internet connection for multiplayer or single player gameplay. At the end of the day these titles proved that games, which require an internet connection can work and do very well.

Why should this change next gen?

Cloud flexibility allows to run the service at lower costs.
But if the bandwidth is enough, the limits of what the cloud can do depend on the user's connection lag, each task has a maximum acceptable lag, and when it comes to physics, close objects, potentially interacting with the player, require a lower lag than far ones, for which the physics engine can run in the servers at high sampling rate and communicate with the client at a lower rate, as long as it is high enough to ensure fluid motion 8BTW this already happens locally in racers, where the physics engine runs at several hundreds Hz sampling rate, while the video refresh is in the tens Hz order of magnitude. Anyway when the user's connection lag is barely below the maximum acceptable for a task, the cloud can help keeping real world lag closer to the connection's best case performance. Remote AI could accept an even higher lag, but still low enough to ensure a rate in the tens Hz.
This means that for most real time tasks, a ping below 100ms is required, for things that must be synchronised with the refresh rate it must be below 33ms for 30Hz refresh rate and below 16ms for 60Hz.
Before posting this I did several speed tests, the worst, under heavy load, gave me 495ms ping, while the best, under light connection load (just the test page) gave me 36ms ping, so I'd fall short by a few ms to use the cloud for far away objects physics in games with 30Hz refresh rate, but it could be able to run AI, at least of the NPCs not directly and fast interacting with me in the game.

NB: whatever the PR spin, forget running the graphics on the cloud (except precooking some non-dynamic tasks), it would require very low ping and monster bandwidth.

Who needs da ce3LLz. PoWah ov teh CloudZZZ is here. I forecast heavy showers.

Had Onlive, and well it works; it really works. And if that works, this other somehow deferred stuff should also work. What I hate about the cloud is this somehow forced dependency on the service. Once you take that single step/ invest it will be pretty had to cancel your allegiance to the service. I'm not a fan of the idea since I like collecting, but I really see this working on the technical level. On another level, the consumer should decide if this is ok or not. Even then, the mass could be educated in the wrong direction.

The proof is simple common sense.

Sony just bought Gaikai for 380 million. That is the entire Gaikai company and all of their cloud infrastructure. MS on the other hand is spending 700 million+ just on upgrading one of their US datacenters. When it comes to the cloud, MS is playing chess, Sony is playing Candyland.

But hey maybe you're right, and cash-strapped Sony is secretly spending billions on Gaikai datacenters.

OP, idk if you really want an answer or are just looking for a soapbox to preach about cloud Kool-Aid and all that other shit. The Forza 5 video you're downplaying should be more than enough to answer your question. It's not just about "easing administration of dedicated servers". You can play the game and literally never be playing AI if you are connected to the Internet. Every time you race, you are not only making changes to your own Drivatar, but you are improving everyone elses by racing against them. And then when you're not away, your Drivatar races for you via the cloud and even earns you credits.

Compare this to something like GT5 where there is a whole entire mode based on AI racing, only you have to sit and watch. And then when you wanna race offline, you're racing against shitty, shitty AI. So right here at launch we are already seeing the potential for a huge genre changing element via the cloud. And that has nothing to do with "dedicated servers" or "easing administration". It is entirely gameplay related. How any gamer cannot be excited about the potential here is beyond me. They could bring this tech into virtually every other genre, assuming the outcome with Forza 5 is anything decent.

But even the strictly server related changes you are harping on are enough to get excited about. We already see CoD on Xbone moving to MS cloud servers, and now we read about Sony partnering with Rackspace for their own cloud stuff, to match what MS is doing for 3rd parties. Is this not a great thing? Dedicated servers for all? We shouldn't be excited for this? Also look at Dead Rising 3 with AI cloud integration and supposedly a complete lack of load times while playing the game thanks to the cloud.

And these are just at launch. Maybe some of us are excited because we understand the tech and understand the massive potential.

I see that as a different issue, but a bit connected.  The same idea is to continue to collect revenues and make it so no one really owns anything.  The focuses are different though.  Playstation Plus, joining the likes of Gamefly and Netflix's business model are the norm, BUT this is a different issue than what cloud computing gains you from a power perspective.