The 4 biggest threats facing the cloud

August 12, 2011, 4:12 PM UTC

FORTUNE — Earlier this week, portions of Amazon’s cloud computing service crashed, impairing Foursquare, Netflix and Instagram as well as millions of users. While service was quickly restored, it marked the second major incident of its kind in the last six months — and that is raising concerns with some.

Putting parts or all of your company in the cloud — the oft-used term to describe large, remotely hosted data sets and applications — is typically far more cost-effective than relying on traditional servers and internal IT departments. But, incidents like these can also bring a cloud-hosted company to its knees.

Cloud computing is obviously here to stay. But, here are four ongoing issues to watch out for as adoption rises:

As Amazon’s (AMZN) latest incident proves, outages happen. But they may not happen as frequently as you might think. “In many ways the cloud, depending on what vendor you choose, is actually more reliable and often more robust than most internal environments, whether that’s for managing content or managing email,” says Aaron Levie, CEO of a Palo Alto, California-based cloud services firm.

Levie argues that cloud outages are generally rare but much more visible to the outside world. “If my own internal IT service goes down for six hours, that’s not really evident to anyone outside my organization, but because something like this also took down Heroku and Netflix (NFLX), it’s more apparent that something happened.”

By off-loading more data to the cloud, are companies and individuals opening themselves up to hacking and data loss? That’s a question many still ask. The answer, it turns out, is it depends.

Security became an issue with popular file-syncing startup Dropbox last June when the San Francisco-based company admitted that a programming glitch allowed users to log into accounts with the wrong password over a period of four hours. The company fixed the problem and admitted the flaw in a blog post, but not before some users caught on, expressing concern.

Other security lapses have nothing to do with coding errors. Some firms backup clients’ data on tapes or disk drives, destroying them after a period of time. Forrester researcher Chenxi Wang recently told Fortune about a cloud provider which routinely sent their back-up tapes to a data disposal company. In one case, the data disposal company lost all the tapes, along with all the cloud clients’ data on them. (Wang would not reveal which firm it was specifically.)

Some cloud providers store data from several clients on the same physical server. So, Client A might be running on one “virtual machine” and Client B could be running on another, but both may actually be on the same physical server. An experienced hacker gaining access to Client A could also potentially find their way into Client B’s data too. “The risk of that, depending on how the cloud provider, may be minimal, or it may be quite substantial,” Wang says.

Though the term has gotten buzzy in the tech world, many Americans still don’t quite understand the term or its implications for the way they use technology. According to a recent study from the NPD Group, just 22% of American consumers understand the concept, even though 76% of the U.S. population uses Internet including cloud-based services like Google’s (GOOG) Gmail or Hulu.

Cloud services have already worked their way into the fabric of the most common technologies, from sending simple messages to watching movies. As the services grow more and more popular, companies will likely be focusing on minimizing these four threats as much as possible.