Right, except that the problem is the client drops and you have to jump through a ton of hoops to get back to the service, which terminates the connection as soon as you drop. Its not really an issue of 'lag' as it is 'not recovering'
Yes, but in the context of OnLive, connection drops aren't any more horrible than they would be on a regular MMO client. In fact, since the whole problem with MMOs is the distributed nature of them and unpredictable latency to the clients, services like OnLive that put many clients very close to one another in latency could actually improve MMO lag issues.