First off, there are the hardware requirements. In order to run a new PC game at 720p, Leadbetter notes that each individual instance of the game will require "... the processing equivalent of a high-end dual core PC running a very fast GPU - a 9800GT minimum, and maybe something a bit meatier depending on whether the 60fps gameplay claim works out, and which games will actually be running. That's for every single connection OnLive is going to be handling." So OnLive is going to have to essentially buy one computer for each simultaneous connection it has.
Second, there's the video encoding. "The bottom line here is that OnLive's 'interactive video compression algorithm' must be so utterly amazing, and orders of magnitude better than anything ever made, that you wonder why the company is bothering with videogames at all when the potential applications are so much more staggering and immense." There's a video example of the kind of compression needed even to approach this level of speed, and it's not pretty.
Finally, latency. In order for any of this to work, OnLive has to maintain "sub-150 millisecond latency from its servers at least, and a hell of a QoS (quality of service) to guarantee that this will in any way approximate the experience you currently have at home."
Leadbetter offers a few solutions, but they're as unlikely as Rearden's claims -- like licensing OnLive data centers to ISPs in order to be closer to users.