Pretty much, if this happened, people would simply not buy anything. People do not like being watched.
How many people are connected to Steam right now? What, one out of every three thousand people on the entire face of the planet? Right.
I'm not proposing anything more restrictive than Steam, and it's a good sight less restrictive than iTunes. It's also not that far off from what people do with ebooks right now.
Also, Neonivek: Haha, nice.
...I suppose that there would be plenty of options open to people who really can't afford buying games all the time but still want to play them while accepting restrictions. As mentioned earlier, some system where you can add another person to your game license for a small fee would work. And I'm sure some publishers wouldn't mind opting into an actual pay-to-rent-directly-from-the-publisher system, with prices varying based on the game. Maybe a Bronze Account let you play all the Super Duper Solitaire Plus and Minesweeper III: Sweep Harder you want. Maybe you could find a Gold Time-Limited plan where you can pay $25 a month and get any participating AAA game as soon as it comes out, as many different games as you want...but you can only play for fourteen hours a week (recharging by two hours daily). $20 of that $25/month would be passed on to the original publishers based on the proportion of time you spent playing their specific games.
Oh yeah--And installing on more than one computer, or making copies of your games. Notice how online distribution systems not only say "that's okay, go right ahead", but make it easy to do it? (In theory) they keep you from playing on more than one machine at a time, and they ARE your backup. Again I'm assuming that technical issues aren't a factor, because who knows, in five or ten years that might be true.
Hell, if this system really REALLY got off the ground, I could imagine a Library of Congress for games, and requiring creative content licensers/publishers to get insurance something along the lines of FDIC: You pay into a safety net and if your content servers go down for good, the government-mandated fund will ensure that everyone gets their stuff during a clean transition to a new publisher and/or a full unlock. Wouldn't that be sweet?