The idea of cloud-based gaming has been around for a long time but nobody has seemed to have nailed down the functionality because of one major issue, latency. Microsoft has a vested interest in both gaming and cloud based services, so finding a way to resolve the latency issue could be a big win for the company.
And that's exactly what Microsoft Research has done with a project called DeLorean. You can read the full paper at the source link below but what they have done is created a way to render frames before an event occurs in a game and based on your inputs, the platform delivers the correct set of frames to your device. The paper says that using this method they can mask up to 250ms of latency and they do this by combining future input prediction, state space subsampling and time shifting, misprediction compensation and bandwidth compression. When you combine all these features together, Microsoft refers to it as DeLorean.
If you are thinking that cloud based gaming is only good for RPGs and other slower paced games, think again. While Microsoft did test out the service with Fable, they also used Doom 3 as a benchmark too. The end results were that the user preferred to use the DeLorean setup for cloud based gaming over that of traditional cloud based gaming technologies that are currently available.
The implications of this technology, if it works in the real-world as well as it does in a controlled environment, will be a way to deliver Xbox style gaming on any screen that has a solid Internet connection. It's easy to see why Microsoft would want this feature as it could be a huge addition to its Xbox Live Gold product offerings.