OnLive tried to do this and went bankrupt recently, IIRC.

I think they already do. You begin the download and after it has downloaded some portion of the game you can launch it and the stream the rest.

I didn't know about this. Which games?

Blizzard games also do this, you usually only have to download about 25% to start playing

Not Steam, but Ubisoft did this for instance with the latest Far Cry and Assassins Creed.

Biggest win I see is you could even be rid of the steam client.

would you pay $2-$3/hour for such a service from steam?

Probably not. $0.50-$1/hour, absolutely.

Same here. Assuming you game for 5 hours a week that works out to be under $300/year. Much cheaper than buying and keeping a gaming PC up to date.

If you only game for 5 hours a week buy a console and save $270 next year. ( minus $30 for an XBL or PS Plus subscription for online play and free games ) Also it's locally rendered thus no input lag and you don't need to tie up your entire internet pipe when you want to game.

I think this ignores a lot of other points.

Console requires a high quality TV.

Console may require controller or other accessories to play local multiplayer.

Console games are significantly more expensive, especially for a more casual gamer.

The games they like to play 5 hours a week may only be available on PC.