It is a large data center and the host creates the OS (Windows or Linux) on the machine and allocates X amount of resources (RAM, CPU and storage), then it shares those resources to compute. Then you can just RDP (software that allows you to connect to the host) and install or use applications on the virtual machine.
There are lots of different options. One option is to create a virtual machine on your computer (that is the pre-version of cloud computing) and install an OS and applications and run the OS inside the host machine.
Virtual Box That concept is the same as a cloud based machine, but it runs on your computer. If your computer is powerful enough, you can have several different OSes on the same computer. The trick is to interact with the hardware, so routing sound input (like an audio box), configuring for intensive GPU usage (like CAD), becomes more problematic as that software talks directly to the hardware (like ASIO which bypasses most of Windows OS audio services).
It can be useful, I have used them (or had them setup) to demonstrate special manufacturing systems (simulating the hardware), developer systems so all of the required "tools" are on a machine and that way you just require the contractor to have a way to access the virtual machine (RDP/VPN into the machine) or if you need to run an enterprise machine and you put all of the software on the virtual machine, and the company accesses it (like ERP systems). That way, the company's IT department doesn't have to worry about disaster recovery. This last example is what happened to Delta Airlines and a few other airline companies who was using Microsoft's cloud services.
If you haven't already heard of it, these are the huge data centers that are going into rural communities to "suck up" their local resources (electrical grid).