I work at OnLive on the engineering team and I'm also an avid PC/Console gamer.
Cloud gaming currently meets the needs of some types of gamers. People who can't afford big beefy boxes, people who are mobile on the road away from their consoles, and those that like the convenience of being able to play the same game and the same game saves regardless of your computer.
Cloud gaming does have a lot of challenges though and lag/latency is definitely one of them, but it's getting easier to address all the time. Keep in mind that a lot of current gen LCD TVs add ~45ms of latency just in the TV. As these things get better and the networks get better I think we'll see cloud gaming become a more accepted method of gaming and it's clearly on the roadmaps for Sony, Microsoft, etc. Just look at the Sony-Gaikai acquisition.
Oh, and regarding multi-player, the way our cloud gaming works, it actually doesn't matter how many people are playing. Your particular local client/internet connection is never taxed because the rendering/multiplayer logic is all done in the cloud.
Thanks,
John Speck