For $25 a year, Apple's iTunes Match feature can scan your iTunes library and match up (if possible) any songs you have that you didn't buy from iTunes with the same track in Apple's Store--and then you can access those tracks from all your computers and iOS devices, just like tracks you bought through iTunes. This is in sharp contrast to the cloud-based musical offerings from Amazon and Google, which require you to actually upload your music to be able to access it (although those services allow you to stream your music, rather than just download it like Apple's).
Even better, once iTunes Match has "matched" those tracks, it replaces low-bit rate versions with 256-kbps, DRM-free AAC versions. For the songs iTunes doesn't offer (Apple says it currently has 19 million tracks) you can upload your own files instead. Apple says that you can store up to 25,000 matched and manually-uploaded tracks--iTunes-purchased tracks don't count against this limit. For those with really big iTunes libraries, we don't know how you'll decide which tracks and albums you want access too. Also, it's unclear what happens when you stop paying the annual subscription fee, but if it's anything like other subscription music services, chances are that a portion of your iCloud experience will cease to function.
If I don't renew iTunes Match after a year, do I lose all of those non-iTunes songs I downloaded to my devices?
We don't know. If we had to guess, we'd say you probably get to keep those files forever, but when your subscription lapses, you will no longer have access to them on iCloud, so you won't be able to download them to any device on demand. We're guardedly optimistic that the music files themselves will remain intact and playable, but detached from the cloud.
Does it work with any other purchased files?
Yes, you can set up your iOS devices to auto-download newly purchased apps and books as well.
What about other iTunes Store content, like movies and podcasts?
At this point, it looks like the iTunes in the Cloud features are limited to music/apps/books, so no TV shows, movies, podcasts, or iTunes U content downloaded from the iTunes Store. That could be due, in the case of movies and TV shows, to concerns about bandwidth and/or licensing agreements with studios. But we suspect Apple will extend iTunes in the Cloud to at least some other types of content at some point.
Can I use iCloud to back up my iOS device?