The idea with the streaming is the game would be re-written to be optimized for streaming. Then instead of "loading" you'd essentially have "downloading" where it technically wouldn't be streaming but only downloading a level at a time. With current compression techniques and and any server lag just being added to the "loading" time games would play very similar to how they do now.
The reason for streaming instead of strait up downloading is simple
1. No piracy, if the game is gone as soon as you shut the console off, you can't pirate it
2. No large hard drive space required, After the formatting, Xbox OS/Dashboard/Guide Code/Cache Space, etc. you probably only have about 10gigs left for game saves, custom soundtracks, downloadable content etc. So where exactly would you download a whole game. Streaming the game, you would only ever be using as much space as a game demo at any time... which would typically be less than 100MB, probably even less with the right compression and optimization techniques.
3. They can offer a "games on demand service" $30 a month for complete access to the entire Xbox and Xbox360 catalog would be a very sweet deal, not to mention, much like a modded Xbox you'd never have to get up to change game discs.
4. Video games are VERY popular, by offering bandwidth hungry services it helps provide a reason for locations behind the times to get up off their collective asses and upgrade. If no one ever developed an application that used more bandwidth than we have now then no one would ever upgrade their content delivery system. If no one ever made HD content, no one would ever make or buy an HDTV... it's the same thing
