Cloud gaming certainly has potential, as you would not need to rely on your hardware to play a game that could potentially have top of the line performance in terms of graphics. Theoretically, somebody cloud gaming on a PS3 could play a game being driven by the best possible PC setup (albeit limited to 1080p).
Plus the need to keep buying new consoles every few years to enjoy higher performing games would be moot, as you could literally use the same system for a lifetime. And perhaps cloud gaming would allow cross-platform play of games and online services regardless of what brand you own. So for example, a PS3 user wants to play Mass Effect 1 on their PS3, no problem. Halo games, GeOW etc etc.
Although cloud gaming has a TON of drawbacks, things like lag, being 100% reliant on the net to play games, net speed limitations, server issues, potential data loss etc etc etc. As of now, I don't believe our infrastructure can handle it, maybe in 15 or 20 years when the slowest net connection somebody has is 50 Mbps up/down on fiber optic.
We can't deny this kind of thing is going to be the future, and it's already amazing how much the internet is being used now as it's exponential growth is staggering. I can't even imagine what things are going to be like in 20 years... I can just picture everything will be net-based and streamed.