Video game consoles have been partially reliant on the cloud for over a decade. Microsoft (MSFT) launched Xbox Live back in 2002, but that Internet connectivity is related to multiplayer gaming, buying independent games or downloading extras. It doesn’t impact the ability to pop in a disk and play locally.

With the release of next-generation video game consoles, though, the cloud has become even more important. The Xbox One, for example, has the ability to hand off processing-intensive tasks to the cloud for more realistic graphics and smarter AI opponents.

And when Sony (SNE) announced the Playstation Now video game streaming service at CES 2014, we reached the point where the cloud is required to play a game (albeit an older title that’s not available on a disc).

But as video game console makers move closer to Internet reliance, it’s worth noting there are substantial risks to go along with the cloud’s benefits.

Video Game Consoles Relying the Cloud: A Risky Innovation

This holiday season presented a good example of just how badly things can go wrong on the cloud. All the major gaming services, including Nintendo (NTDOY) and Valve’s Steam, ran into overload issues as gamers who received new video game consoles and games tried to get online. The result was forums full of user complaints, apologies from PR teams and the handing out of freebies in an attempt to smooth things over.

Despite the chaos, owners of video game consoles were at least able to play single player games. The widespread cloud issues mostly impacted their ability to access social features, take part in multiplayer matches and download content.

Microsoft’s approach of keeping the hardware costs for video game consoles down by providing cloud muscle for game developers to tap into is an interesting one. If it pays off, it’s possible that Xbox One games will get better and better as developers take advantage of the option. What’s less certain is what happens to a cloud-based game if Microsoft’s servers have a hiccup or the connection is slow.

Do the graphics suddenly become less detailed and the AI opponents less smart? Does the Xbox One try to pick up the slack itself, keeping everything pretty but causing frame rates to chug? Does the game get glitchy? Or does everything shut down until the cloud issues are resolved? That’s something we should be hearing more about as Xbox One developers begin to leverage Microsoft’s cloud capabilities.

Of course, the mother of all cloud nightmares when it comes to video game consoles is a repeat of what happened to Sony’s Playstation Network in 2011. The PSN network was hit hard by hackers who managed to steal information from 77 million accounts, including a large chunk of credit card data. As a result, PSN was offline for nearly a month, meaning PS3 and Playstation Portable owners couldn’t play online games, communicate with PSN friends, download games or access other online features like movie rentals.

The mess ultimately cost Sony $170 million and was a PR nightmare. Game publishers lost online sales and had to deal with customers who bought titles specifically for the multiplayer component, while independent publishers that sell download titles through the PSN Store had no revenue for that month. Many Netflix (NFLX) subscribers who relied on their PS3 found themselves unable to access streaming movies.

Just image what a PSN-like attack would look like if the cloud was required to play all video games on a console.

Gamer outcry derailed Microsoft’s plan to require the Xbox One to connect to the Internet daily before allowing players to have at it, but the PSN example should have prevented that idea from ever making it to the drawing board, let alone be confirmed as policy.

Another cautionary tale of cloud gaming came courtesy of Electronic Arts (EA), with its 2013 PC gaming release SimCity. One of the most highly anticipated games of the year became the most disappointing thanks to a required Internet connection to play that turned into frustration as servers repeatedly crashed under the load and SimCity owners were unable to play their game for extended stretches — even with a disc and single-player mode.

Sony’s Playstation Now will be a good litmus test of what happens when a company goes all in on the cloud, while Microsoft’s leveraging of the cloud for supplemental Xbox One processing power will prove whether relying on the cloud to beef up single player games will pay off in reduced hardware costs for video game consoles.

At the moment, Microsoft, Sony and Nintendo have a relatively easy fix for dealing with bandwidth and connectivity issues with their online networks — throwing more hardware at the problem by bringing additional servers online. However, that doesn’t address the other issues that aren’t related to capacity, like players’ individual connection speeds and download caps, general Internet slowdowns and above all, the risk of a major hack like the PSN outage knocking them offline altogether.

Until these critical issues are addressed, any thought that the next generation of video game consoles will make the leap to greater cloud dependence is iffy. The possibility of your entire customer base being unable to play games altogether is simply too risky.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.