Ah, there's the rub. It may be rendering a 720p canvas, but for all we know it's rendering a filthy blotchy version of it - much like streaming movies sounds great (and is good as far as it goes), but when you put the image next to a well-mastered DVD - never mind an actual HD system - the differences are painfully obvious. Similarly, if you've ever uploaded some pristine video, which you know very well, to YouTube and then looked at it a few hours later it looks pretty hideous at the normal quality, and only OK at the high quality.
In both these demos the video looks fairly smooth and responsive, but all the same we're seeing OTOY as filmed on a screen by a camcorder and then further compressed by YouTube itself. I strongly suspect that an uncompressed (or non-lossy) capture from FRAPS of the actual video in the browser window will make the difference pretty stark. I would love to be wrong of course.
The other thing I wonder is how this is going to scale and what they need at the server end (I sure can't see this being peer to peer). It does make a difference if the server side is running an nVidia Tesla (~$1500 and up) or some similar graphics powerhouse to do the almost real time compression.
It's still impressive, I like the concept, and they sure took on a big challenge. But I'm not expecting Crysis on the iPhone anytime soon. On a side note, although gaming has the most obvious market and monetization potential, what I find exciting about Otoy are the possibilities for film and scientific visualization.