Game consoles as you know them could become obsolete sooner than you’d think. Imagine a supersvelte thin-client box that streams HD games in real time over the Internet. Pay a subscription fee and it can run the latest games at reasonably high resolutions on your TV, PC or Mac. We just saw–and tried it–for ourselves. It’s called OnLive.

This box (that fits neatly in the palm of your hand) has a couple USB 2.0 ports, Bluetooth support, optical audio and HDMI out jacks. That’s about it. The OnLive “microconsole” doesn’t have much in the way of juice (CPU-wise), but it just let us play Crysis at 720p on an oversized HDTV. It blazed through a couple races in Burnout: Paradise City and GRID.

Oh, yeah, and not only is it doing all this with minimal hardware overhead, it’s ultra-fast Cyberdyne systems-type servers (currently set to launch officially in late 2009; beware the terminator apocalypse) takes full advantage of cloud computing. Beyond stashing your saves so that you can play your games anywhere you log in, the game graphics are rendered hundreds of miles away and then shot to you via ultra-optimized internet packets.

What did GamePro Senior Editor Sid Shuman and PC World Senior Writer Darren Gladstone make of the performance? We were able to quickly toggle over and spectate matches of other players or record 15-second “Brag Clips” of some greatest hit moments. The games loaded surprisingly briskly. And there was almost no perceivable lag (trust us, we looked). The main drawbacks: You need exceptionally fast 5 Mbps speeds to attain HD 720p visual quality (standard def video can come out over 1.5Mbps lines), and the video compression smears out a bit of the graphical lushness. But as a whole, OnLive made for a mighty impressive demonstration of what may be the future of video game distribution. And we wouldn’t be surprised if straight-up HD videostreaming wasn’t far behind. Should GameStop (and other retailers) be terrified…? Shuman and Gladstone hashed it out over IM.

Sid: When we finally got hands-on with OnLive, I gotta admit, I was impressed. I tried my hand at some Crysis multiplayer, running in 720p, and the experience felt smooth…surprisingly smooth, in fact, considering that the graphics were being rendered on a server down in Santa Clara.

Darren: I know, they tell us that the server farm locations need to be within a 1000 mile radius, so I’d be interested to see if the service can still deliver the goods if I’m playing from someplace a little more remote. That said, yeah, it was a fairly solid frame rate — what would you say, about 30-35 frames per second? There was a little bit of hinkiness, but not too much.

Sid: Which brings up a good point: just how fast does my internet need to be in order to get an enjoyable experience out of OnLive? For 720p HD video, OnLive requires a high-speed broadband connection rated at 5Mbps; standard-def video can swing as low as 1.5 Mbps. And though our experience was smooth, it was a controlled experience provided by the manufacturer. The real question is whether OnLive will hold up in the field, right? Like, will it run smooth and stable on my brother’s dorm room network?

Darren: Seriously. How many people really hit that magic data speed connection? Will it work wirelessly? At the local Starbucks? Yeah, I think I already know that answer, but that doesn’t take away the fact that whether you buy the microbox, or just play through your PC / Mac, you’re still getting a solid gaming experience usually reserved for high-end game rigs. (And at one point about two years ago — and I ain’t stretching the truth here — I tried running Crysis at 1080p-equivalent resolution and barely cracked a 20 frame-per-second slide show. And that was on gaming computer that cost more than $5000 at the time.)

So the fact that I’m seeing 720p Crysis running on an HD set is fairly impressive.

Sid: Yeah, and see, that’s exactly where OnLive can do some big damage. I bailed out of the hardcore PC gaming scene back ‘05, largely because I was sick digging around in my PC’s guts to install new motherboards and video cards. The promise of something like OnLive is that you’d never need to upgrade your PC again to play the latest games. As long as your broadband connection is fast enough, OnLive’s backend servers render all the graphics for you. And in time, those graphics will just get better as OnLive upgrades its server hardware. Smooth, playable Direct X 11 gaming on a $500 netbook? That’s impressive any way you look at it.