This is basically a game-over-VNC. Obviously, they use video compression; what kind i'm not sure about. Two obvious alternatives seem somewhat computationally easy, for example, a JPEG motion or even MPEG 2 running on the same server the game is running on, or something more computationally intensive, but compact, like H264 running on dedicated equipment.
Personally, if I were developing a service, I would go for the second: it allows you to have better compression without mass updating all your servers, for the cost of a relatively inexpensive codec chip. Since the video stream is smaller, you can attract people who have connections that are small or too slow using a poorer codec.
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