You seem to not have any idea of the economies involved here. Plus I'm not arguing that it's impossible, I'm arguing that it's not what MS have suggested.
If you listen carefully you would hear that demo from Intel was running on 4 larrabee equipped servers. Intel now sells Xeon Phi cards like that. They cost thousands, and draw 300 Watts of power each. Far too expensive to build and operate. Just because it can be built, doesn't mean it can be done economically and be a "goldmine". Cloud compute is very elastic, but it isn't free. Xbox Live Gold would have to be 10 times more expensive to pay for that.
Also your example is just like Playstation Now - it's a game fully rendered in the cloud and streamed to the client as a video. He mentions the client is a "thin client", ie. it's just something to display the video. Same as Sony will stream PS Now to Vita TV, smart devices, etc. because all they need to do is display a video.
You don't need a $500 Xbox One console to play Gaikai or OnLive on it.
@Bolded: Do you understand that since 2009, MS has spent more than 4 billion on their datacenter. At this point in time MS has more than a million servers around the world making them second to Google. Just in the last 2 years MS has spent more than 2.5 billion on building their cloud infrastructure. It seems pretty obvious to me that MS is spending the money in this space. ... /snip
All impressive numbers in the context of running a search engine, Outlook mail, live.com, office 365, etc. and many 3rd party services.
You could run some killer benchmark on 1 million servers .
Though in the context of power assisting a big userbase of Xbox Ones of say 10 million units a year for the next 5 years, it's not so big. It's not like some limitless resource when it's hammered by 10s of millions of XB1 gamers, and 100s of millions of other MS service users.
MS is putting lots of investment into cloud to a) power all of it's services like Bing, live maps, etc. [as Google] plus b) to sell hosting as a business [also as Google]. You're jumping to the conclusion that because they've invested so much, they're about to revolutionize gaming too.
If you want to estimate how much cloud power XB1 users will get, look at how much $$ cloud power costs and then try to estimate how much MS $$ is taking from users to pay for the cloud.
For example look at Amazon's prices. http://aws.amazon.com/ec2/pricing/ . Let's say you pay $50/year for XBL Gold, and you play XBox 1 hour a day, then you can pay 14c per instance hour. On Amazon that will buy you 1 hyper thread of a 2.8GHz Xeon core. Kind of weak. But MS is building this themselves so let's say it's 4X cheaper... we can get 4 hyper threads of a Xeon core. That actually is in range of what MS have hinted. Cool.... so with that you can do some interesting stuff, but as far as graphics please believe me that you can NOT even do PS2 level graphics.
Set your XB1 Cloud graphics expectations no higher than this: http://www.youtube.com/watch?v=m0uVW2AZ1xY . In other words don't expect anything because it would be a waste of time.