The biggest downside is how many potential console purchasers would be excluded simply because they do not have a fast enough internet connection. Have affordable fiber optic services available to 70+% of the current console install base and then we'll talk.

 Yeah sega dreamcast was the first console for online gameplay but it was very limited and back then most people still had 56k lines.  Not until the xbox came out did it really take off, mircosoft knew online gaming was going to be massive.  Shame sony didn't think the same way at first.

I think Microsoft will build something like this into their next console. They will not pull all the way out from physical media but this is the direction they would like.

Consumer broadband limitations (especially with the concept of download caps beginning to spread) as well as the inevitable server problems on OnLive's side is going to keep this down for some time. It'll be a grand, and pleasant, surprise if this thing really gets off the ground at all.