If I paid a subscription fee of $5 a month for ever game I regularly play I would end up paying about $100 dollars a month.
This would indeed be retarded, which is why the subscription has to be a flat fee and less than around 20 bucks a month - otherwise people will just buy hardware. I'd guess around $15-$20 a month for the service, normal one-time fees for games just like any other digital distribution, and rental fees comparable to existing rental services.

Also, Crandaeolon, you are forgetting about independent developers like M&B who would not have ever gotten a shot if this is how all gaming was done. It would get rid of the individuals power to develop their own games/mods and distribute them. That IMO is reason enough not to buy into this.
I don't see why indie game devs would be harmed by any form of piracy-free digital distribution, quite the contrary. Also, PC hardware will undoubtedly be around in some form, there's just less need to be at the cutting edge - hardly a problem for indie devs, since indie games tend to require less power.

But about mods, that argument I'll buy. Modding would certainly be complicated if not impossible.

I don't think Onlive, even if it works perfectly (very unlikely), will monopolize gaming. I'd see it more of an alternative to consoles and a platform to play AAA titles and multiplayer games.