well first and foremost it's not a replacement for actually buying games.
and you wouldn't be buying on a game by game basis either.
lets compare it to music.
Napster* offers unlimited downloads for $15 a month (or something like that). You can listen to whatever you want, whenever you want, but as soon as you cancel your subscription you can't listen to any of it.
Now I can go buy a CD for $15 but I can only listen to that CD... and I don't have to worry about paying any fees to KEEP listening to that CD.
with the Xbox game on demand service I would pay say $30 a month and play whatever I wanted whenever I wanted but as soon as I stopped paying my monthly fee I could no longer play anything.
Similarly I could pay $50 for a single game DVD, I own the disc but then I can only play that game, but I also don't have to worry about paying any fees to keep playing that game (unless it's an evil MMORPG).
see what I'm getting at?
*Note: I don't have the Napster service and really have no idea how it works, so don't bother arguing about the details if I got them wrong.