Sony has largely overshadowed Microsoft when it comes to cloud gaming. PlayStation Now, their cloud streaming service, is meant to provide backwards compatibility for the PS4 and to be a major differentiator from the Xbox One.
However, Microsoft has been working on its own cloud gaming services, and demoed it last year on a Lumia device. The DeLorean study is a big step forward in Microsoft's cloud computing future.
The premise of cloud gaming is very simple. Instead of the device you own doing the heavy lifting, it is done on a remote server. Your device sends your interactions to the server, and it displays output frames from the server. This allows you to play games on a variety of devices, and is what allowed Sony to promise backwards compatibility even though the PS4 does not support it itself.
Aside from backwards compatibility, there are many other possibilities. To use cloud computing you would not need as powerful a machine, basically a glorified streaming device. Devices less powerful than the Xbox One, such tablets and phones could allow you to play games that they by themselves could not handle.
The problem with cloud based gaming is basically latency. Since you are communicating with a server, how do you make the experience seamless and smooth?
This paper by Microsoft Research may hold the answer. The DeLorean project aims to account for up to 250ms of network latency by delivering rendered frames up to one round-trip time (RTT, also called Ping), the time for a packet to be sent by your computer and acknowledged by the server. It aims to do this by future input prediction, state space subsampling and time shifting, misprediction compensation, and bandwidth compression.
They have tested the system with Doom 3 and Fable 3, and found that DeLorean "successfully mimics playing across a low-latency network". The future of this is very exciting, as it could expand the gaming experience between all Windows devices - phones, tablets, consoles, and PCs.
What are you hoping cloud gaming will bring to your gaming experience? What devices do you want to see it on the most: a similar experience as PlayStation Now, or on lower powered mobile devices?