In 2k5 you were not playing against a player A.I. It took some very basic tendencies and imposed them on the computer A.I. In practice it didn't change the gameplay at all, which is why they didn't continue putting it in games. Drivatars continually take data about everything you are doing. Compiles that data with other drivers and evolves it over time. Its like each individual person creates their own A.I. In practice this profoundly effects gameplay and as a result the A.I. Is the most advanced and varied in any racing game.
They aren't nearly the same and yes everything in the cloud COULD be done locally. After all the cloud is just a bunch of servers. Point is the amount of resources needed to do so would serverly cripple the game elswhere, and that's if the console would even have enough power to do so.
