One other thought - have you considered using DCC to control the servo and avoid the wifi complexities? There are some nice Arduino DCC solutions about that use minimal extra circuitry to do the decode.
Mel - I have looked at Arduino with WiFi for another (non-railroad) project that required video streaming, and everything I have read indicates that it just isn't up to the task in terms of CPU throughput. Especially if you want a decent frame rate. That position may change, of course, with newer, faster processors, but that was my take-away when I looked around middle of last year.
If you just want to do the servo control over wifi then that should be achievable, but I don't have direct experience of doing that yet.
[edit]Also Arduino Yun has built-in WiFi. May be a smaller overall package?
Bob
Mel,
My experience with the SQ8 suggests its close field of focus tends toward rather fussy and mediocre. Maybe you should consider some other camera, which might even have a means to more directly monitor the image?
Mike Lehman
Urbana, IL