Are you serious about today's games being bad? I really can't relate to that...
And pirating is probably as high as it has ever been.
So yes, new and better games always have to be a priority, but new technologies make new things possible.
For example 200 people playing against each other, like the coming MAG for PS3, is innovative and only possible because of new and faster technology. With OnLive you could raise that to 1000 or more...

As for the latency.
I think the multiplayer analogy is quite good. You could play CS with very little lag a few years ago, when cables, servers and computers where much slower.
Now all that has gotten faster, so more data can be sent. Not much faster I know, but more.
So instead of sending only information about the position of players and the key inputs, they send you the whole picture. I don't see how that is much of a difference, except that everything has to be processed much faster. And that is, or will soon be, possible...

They showed a racing game at GDC and it's supposed to run smooth enough so that it's playable without noticeable lag.
So they're clearly not just going for a certain type of games, but they build it so that you should be able to play any king of game.
We'll see if and when they get to that point.