I'll add to what should and what will happen a third category: what could happen. But first:
The problem with public domain is that there's no legal requirement for the publisher to give it away once the copyright expires (if they are the sole possessor). If something is legally public domain but no one has a copy, then it doesn't matter.
If we had a library of deposit (publishers legally have to provide a copy to e.g. the library of congress) for commercial software like we do for books, that would fix that.
Another thing that could happen is that consumers could just reject game streaming like they did in the 80s (GameLine) 90s (Sega Channel) and 00s (OnLive)... I think those were technical, not consumer rejection problems though, but I'd be glad to be wrong. Nevertheless, I'll do my part by never paying for a cloud game. If consumers reject it, it'll die off and games will continue as before. I also hope the PS5 digital fails; already I can't use a bunch of PS3 game features (gran turismo track editor, dlc, etc) since the servers are shut down.
One more thought: mods and custom servers can do special things that people love, and that will always be viable, and worth a lot of money. If Arma II were a cloud only game, DayZ wouldn't have been made, which means neither would PUBG or Fortnite have arisen. Maybe the concept of mods will always keep the local game alive?
I don't think you're wrong with regards to past consumer rejection. I think people were now primed with the spread of internet and the SAAS / cloud culture that followed in the 2000s, then in the meantime smartphones happened, lootboxes / gacha became normal on phones then later in the wider gaming culture, music streaming gained steam and Netflix finally made a successful media streaming service... normalizing consumer behaviors which were previously alien to many consumers. But now the market is ripe for cloud gaming to become popular. Sometime in the 2010s maybe game passes on console also become a thing - the type of payment when as long as you hold the subscription, you have access to the downloaded game. I think that considering these changes in gaming and consumer behavior explain why cloud gaming is now acceptable enough to be profitable, or to be a thing at least.
Regarding Arma II and DayZ, and so on, I don't particularly like this type of thought experiment. I think if we allow the liberty, the opposite conclusion can also be drawn: think how much productive these people could have been if they haven't wasted their energy in these mods. Or what else could they have made - contributing to free software instead, or any other social good. And the ideas are also not original, I mean in general; the light bulb, the radio and the telephone all got invented independently in different parts of the world, so, Arma II being a cloud only game, we wouldn't have DayZ and so on, but we'd have something other that made battle royale a popular gaming phenomenon.
I think you're onto something with modders. I think local / non-cloud gaming will be alive as long as there are devices that run third party software without much issue. The games might not be very advanced or flashy, the AAA titles will surely go extract as much rent as possible, but I'm sure that the next Minecraft, Stardew Valley, or Teeworlds will get made, as these all began (or still are) passion projects of a single person, and sometimes, people just want to give. So I think passion projects will keep the local game alive - be it modding, an indie game or free software.
The problem with public domain is that there's no legal requirement for the publisher to give it away once the copyright expires (if they are the sole possessor). If something is legally public domain but no one has a copy, then it doesn't matter.
If we had a library of deposit (publishers legally have to provide a copy to e.g. the library of congress) for commercial software like we do for books, that would fix that.
Another thing that could happen is that consumers could just reject game streaming like they did in the 80s (GameLine) 90s (Sega Channel) and 00s (OnLive)... I think those were technical, not consumer rejection problems though, but I'd be glad to be wrong. Nevertheless, I'll do my part by never paying for a cloud game. If consumers reject it, it'll die off and games will continue as before. I also hope the PS5 digital fails; already I can't use a bunch of PS3 game features (gran turismo track editor, dlc, etc) since the servers are shut down.
One more thought: mods and custom servers can do special things that people love, and that will always be viable, and worth a lot of money. If Arma II were a cloud only game, DayZ wouldn't have been made, which means neither would PUBG or Fortnite have arisen. Maybe the concept of mods will always keep the local game alive?