It'll probably carve out its own niche, but I just don't see it taking over gaming on dedicated, personal systems. PCs are always getting more powerful and cheaper and anybody who is a gamer has one, not to mention a console or two. Why would I need another service to let me play my games when I already have the hardware to do it, plus I can play them whenever, where ever, and without an internet connection (excluding a few of those DRM-heavy games like Splinter Cell, etc).
For some very casual gamers who spend most of their money on a beefy internet connection, onlive might be a good way to go but for the rest of us (the large, large majority of us) its best just to stick to our own personal hardware that we can control.