Intel's ray tracing guru Daniel Pohl spoke extensively about cloud gaming and what possibilities and challenges lie ahead for it at the Cloud Gaming USA 2012 conference that went down in September in San Francisco. He emphasized that games offered today by cloud gaming vendors are just the same as their PC or console versions. He said that a powerful cloud could do much more and there is huge potential in the cloud using rendering techniques like ray tracing and voxel rendering, and for doing photorealistic rendering. Games built with the cloud in mind could look and behave lifelike running on hardware being used in cloud gaming data centers that is magnitudes more powerful than PC hardware that we use at home today.
Daniel Pohl also pointed out the obvious current problems with cloud gaming like latency and bandwidth. He said that the first thought of just focusing on the internet latency is wrong as there are many other sources of latency in the chain that connects the gamer with the cloud. He discussed those sources of latency in detail and suggested how to fix them. Speaking of bandwidth, he said that sufficient bandwidth is at least as important and the upcoming boost in screen resolutions that will go well above 1080p could soon be the biggest challenge for cloud gaming.
You can view the slides from Daniel Pohl's speech at the Cloud Gaming USA 2012 conference. Below is the video of a dry run of the speech.