In the short term, this would be for multiplayer games where the same simulation can be used for multiple players and hence the cost per player would be lower. The ideal solution to get the most out of this for developers would probably be to have big world with at least 64+ players, the more the better, where the same AI and physics simulation would apply to more players. It's fine as long as the cost per player is negligible, but you're right that what we saw in the demo probably isn't viable.
In the long term, everything will be offloaded to the cloud. All that is done on the client side is decoding a video stream and sending controller inputs to the server. Every player will pay a subscription fee to get to play the games on the cloud and different subscription tiers will have different performance and game access.
The developers lose nothing because they will just be selling their games (or licences to use the game) to the game service provider (e.g. Microsoft). The service provider, on the other hand, doesn't need to pay for R&D, manufacturing, and shipping of dedicated console hardware, so they will save there.
This, or something along the lines of it, will definitely be the future of gaming. It's the best model for everyone but the player.