Not 'replacing' consoles...
Yes, consoles have other uses, and I don't think services like this would necessarily replace the machines themselves - at least in the short term. Rather, they would provide an alternative to forking out another £3-400 on having the latest tech client-side when the PS4 comes out. Don't forget, console makers often make a loss on the machines - especially the first few years. There is a strong incentive to shift to this model.
To elaborate, Sony could develop an OnLive-style service playable via a simple firmware update on the PS3. Kutaragi spoke of the potential for streaming games many years ago (long before OnLive came about) using Sony's LocationFree TV streaming as an example - it's just he was so cryptic about it that no one really got the implications of what he was saying. This is something that, once fast and truly reliable broadband networks are finally in place, is coming to ALL consoles.