Onlive is not some fly-by-night company. They've been around for a while now as a streaming video game service. Microsoft does allow volume licensing for use by third parties. It's all legit and legal.
I don't think anyone seriously thinks they're not legit but at the same time, no one can figure out exactly how they are doing what they are doing with regards to both the hardware platform and the software licensing. There is an interesting article on it here, though it raises more questions than it answers;
http://www.brianmadden.com/blogs/ga...ization-solution-you_2700_re-looking-for.aspx
Best guess appears to be that Onlive are running dedicated hosts for each instance on a custom blade type system. Or something like that.