Gabe Newell skeptical that cloud gaming is the future

As a new generation of consoles prepares to descend on us, one question on everyone’s mind is: where does cloud gaming fit in?
Cloud gaming services such as OnLive and Gaikai (now owned by Sony) are heavily reliant on fast Internet connections; a luxury not everyone can afford or that’s even always available. That’s only part of the reason that Valve CEO Gabe Newell doesn’t think cloud gaming will become mainstream. Speaking at D.I.C.E., Newell said "cloud gaming works until it starts to be successful — at which point, it falls over."
Wait, what? How does a more successful cloud platform become its own undoing? Look at it like this: cloud gaming is all about streaming games from a remote server to your TV, computer, tablet or phone, right? Newell says that there’s a growing network cost that comes with maintaining the backend as the platform explodes, instead of an individual cost per console, or PC, or Steam Box. Therefore, the more successful cloud gaming becomes, the higher the network costs will be. And whose pockets would those costs come from? If you’re guessing it’ll be from the users, you’re correct. That, or the supplier eats the cost, but as those costs rise, that won’t be sustainable.
Latency is another big drawback for Newell. It’s not just people stuck on slow Internet that’s holding cloud gaming back; it’s also the fact that he and Valve think "latency sensitivity is actually going to increase in the future" when games get bigger.
So what does Newell think cloud gaming will be good for? Demos and spectating, apparently.
To all the cloud gamers out there: let us know in the comments what your experiences have been so far. What cloud gaming service are you on? And where do you think cloud gaming will fit in?