You can do this under 10Mb no problem.
I suspect this is partly because 720p statement isn't quite what we expect it to be, either. As a PC gamer, I assume 720p is crisp video with all eye-candy turned on, optimized for a PC monitor.
On the contrary I figure it's a lower-res (maybe 360p) scaled to 720p, that will look nice, in the foreground and... iffy... in the background (sortof like a good stream of Hulu).
I also expect at least some remedial optimization of the game engine specific to OnLive so it looks acceptable on a TV, as in from 10' away... much larger models with much larger fonts and with less background objects comparative to the full depth a PC can handle. (Basically like the xbox360 is now)
As far as for operation, I believe it basically works like this (only on a much better level than I describe, of course):
1.) You have a crappy computer but is able to reliably play a 720p movie (not even heavily encoded BD), just a 720p movie.
2.) You have a friend with a really powerful computer capable of running... oh... Crysis. 😉
3.) You set-up a high-resolution webcam and point it at your friend's computer, fast enough to record and re-transmit the video signal at, oh 30fps.
4.) You have a client that syncs up your keyboard commands to your friend's computer so that your input operates the game.
You can now play Crysis on just about anything. The cloud servers are essentially just transcoding (for lack of a better term) the game video output to more of an interactive movie capable of being interrupted by high-speed input (your keyboard commands.)
You really don't need a whole ton of bandwidth for that... especially when you figure that the "720p" statement is probably taking some fair liberties. But I'm willing to bet that it will look acceptable to the casual gamer, even console gamer, on a TV from your normal "several feet" viewing distance. Not to the scrutiny of a high-res PC comparative.
As far as the business model, I look at this a different way.
If it gets more people playing games on their PCs as a medium, and not consoles, it might interest them in the hobby by introducing them into a very-low-risk environment. Currently, those outside of "the know" still assume that you have to buy a $3000 rig to play the same games you can play on a $300 console. That mentality is one of many drawing people away from PC as a gaming medium, and it's not like there are an advertisements to sway otherwise. All PC game/hardware adverts are based on people already having, and understanding, the technology.