Buffer times and connection loss could be eliminated as problems very easily:
When you load a playlist, your iPhone begins to download all the songs immediately in the background. Since a song is only a few megabytes, several songs could be downloaded in the span of one song during playback. These songs are then cached in a pre-determined sized local library and kept there until needed to make room for new incoming songs. A smart system could be employed to determine songs that should be prioritized to be kept in cache based on playcount and other listening patterns.
In an iPhone with 32GB of flash, a few GB of music could be cached without taking much room yet storing massive amounts of songs without the risk of interruption from slow or loss of connection.
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then it will cause battery issues. Have you ever seen how much faster battery drains while using 3G continuously ?
And responsiveness issue. yes you can already use an iPhone while downloading / updating apps but it's gonna be slower. CoreAnimation will be choppy. And battery will suffer, too.
Whereas locally stored MP3 playing won't harm your iPhone at all and lets you multi-task like a charm and enjoy what makes the iPhone the iPhone : instant responsiveness.
I see iTunes library sharing over wifi working already very badly, it's most of the time unusable at home for audio. Forget about video... So just also forget about streaming from the internet using 3G. Moreover, about 50% of the time, my iPhone gets only Edge and no 3G (Bouygues Telecom, France).
And maybe the biggest issue : I listen to my music while commuting. And basically, there's barely a voice-enabled network 60% of the time. Nothing 30% of the time and Edge 10%. Nothing else (I commute with the tube in Paris). So any cloud-enabled music is DOA for me. I already have Mobile Me and Dropbox for that. Doesn't work practically for me.
So I don't call this cloud thing a revolution, rather a gmmick at best, and ******** for my actual needs.
But maybe, in some better-covered areas, with lucky people with a 100% 3G signal enabled all the time, that'll work...
Well, that was just my 2 cents !