Here's how this is going to work <<bookmarks post for future told-ya-so-ing>>
Imagine a brand new user of iTunes with a brand new Mac and a brand new empty iPod Touch. He hears about this iTunes Match which puts "all his music on all his devices all the time." Sounds good.
He wants some Beatles music. He gets an Apple ID on his computer and buys "Abbey Road" from the iTunes Store. He is asked if he wants purchased items to automatically download to his other registered devices. He says yes. Then he rips his "Magical Mystery Tour" CD at 128kpbs AAC and enters all the metadata. Finally he goes out to the internet and torrents "Let It Be" and "Beatles Bootlegs" at varying MP3 bitrates, and cleans up their metadata.
He now has a Beatles playlist with 30 songs and 4 albums in it in iTunes. He signs up for iTunes Match and is charged $24.95 for the year. iTunes Match scans his library, in all likelihood using a combination of the iTunes Library.xml file and metadata from the songs, and a few moments later throws him a dialog
iTunes Match was not able to match 10 songs in your library. Do you want to upload them to your 5GB iCloud account?
<<clicks Yes - these would be the Beatles Bootleg collection - everything else matched>>
Now he turns on his iPod Touch with iOS5 - no need to plug into the computer, it's PC free. He logs into the Music app with his Apple ID and BOOM magic...there is already a Beatles playlist there with 30 songs and 4 albums in it. He puts it in shuffle mode and presses play. Here's what happens....
When this hypothetical fellow goes back to his computer, he sees the same 30 songs and 4 albums in his iTunes playlist with play counts updated and so on. If he digs around in his ~/Music/iTunes/iTunes Media/Music folder, he will find subfolders for the 4 albums, Abbey Road with his purchased AACs, Magical Mystery Tour with his ripped 128kbps AACs, along with Let It Be and Beatles Bootlegs with all the various MP3s. He will NOT suddenly be the proud owner of full 256kpbs AAC iTunes Store versions of Magical Mystery Tour and Let It Be.
- iPod comes to a song from Abbey Road (purchased iTunes content): Since he said he wanted to automatically download purchased content to his other devices, these songs files are in fact stored locally and taking up flash drive space on his iPod, assuming enough time has passed for them to have downloaded (this happens presently with the iTunes in the Cloud beta).
- iPod comes to a song from the Beatles Bootlegs (unmatched content): Since he chose to upload these songs to the iCloud, they will also download to his device and the song files are there, taking up flash drive space on his iPod, stored locally.
- iPod comes to a song from the Magical Mystery Tour or Let It Be: iPod plays/streams/downloads (whatever you want to call it) the full iTunes Store version of the song in 256kbps AAC glory, indistinguishable from the above 2 scenarios, indistinguishable from the 90-second previews currently offered by the iTunes Store. In all likelihood will have a BUY button visible in the playlist and maybe even on the Now Playing screen. Once the song is finished playing there is no stored file taking up flash drive space on the iPod locally. The song has played, one way or another, directly from the iTunes Store.
This will all be seamless with no discernible buffering or hiccups, and feel exactly like all the music is on the iPod. Over the years he keeps paying his $24,95/yr and increases his iTunes Library up to the max of 25,000 matched songs, another 25,000 songs he purchased from iTunes, and another 1000 unmatched stored on his 5GB of iCloud. He now has iTunes and an iPod Touch with 51,000 songs "on it" although the reality is that none of those songs have to take up any flash drive space, they are all on "the cloud" one way or another and available on all devices all the time (as long as he has an internet connection). If he drops his iTunes Match account, all his music is still on his computer, and purchased songs can be re-downloaded and pushed all around device to device (exactly like now) wireless or with USB. But he loses the seamlessliy integrated cloud access to the matched songs and the unmatched uploaded songs. That's what the $24.95 is paying for.
If you know how LaLa worked, or understand how Spotify or Pandora work, or even some of the currently available iOS apps that stream your iTunes Library from your always-on computer using your home internet connection, you should see that this is Apple's typically elegant entry in this same sort of service. They are marketing it as YOUR music on all YOUR devices wherever YOU are. But really it's Pandora using your iTunes Library.xml for the playlists and Apple's copies of the songs. The "same benefit" given to matched songs or unmatched but uploaded songs is that they appear in the cloud and can be played anywhere anytime (that you have an internet connection).
Is your scenario taking into consideration the bandwidth caps that are becoming commonplace with wireless carriers though? Or the fact that iPod touches aren't always in range of wifi? If the scenario you spelled out above (and the example) is true, then that person with "51,000 songs" loses access to most, if not all of those the minute he goes out for a jog with his touch if this is a streaming only service. Or, if he's reached his monthly bandwidth cap on his iPhone, he can't stream anymore of "his" music without paying ridiculous overage fees for the rest of the month. Apple seems like this is the type of thing they don't want their customers worrying about, and I doubt they'd implement it this way and have the customer "hate" the service (and ultimately Apple) because of it.