What does the latency between performing an action and seeing the result have to do with the FPS at which the game is streaming into my monitor? If OnLive is sending me 60FPS, but my latency is 60ms, is just means that everything I see/do will lag by 60 ms... but I'm still seeing 60FPS of action. You likely won't notice the lag, and if you do then your senses will adjust rapidly to the slight lag and then you won't notice any more.
Latency is not their problem here.
It is for me. The round trip lag between moving my mouse and my viewport moving made it impossible for me to reasonably play Borderlands when I tried out the OnLive system. It may be ok for casual games, but lag between input and display is a far worse experience than an equivalent amount of network lag, which games typically have prediction code to deal with.
Perhaps they can colocate their servers with ISPs or telco exchanges or something but will that be enough and can that truely scale given the consistent hardware upgrade requirements they're going to have?
[1] 1000ms/60ms = 16.7fps