When your music is scanned, Apple mirrors your collection with it's own collection of songs on Apple's servers. The music is DRM-free 256kbps AAC files and even if your song is of lower quality you will get you enjoy the the better file courtesy of Apple.
You can store up to 25,000 songs of our own. Any songs you have purchased from Apple, will not be count towards the total. iTunes match will cost $24.99 a year, and is currently only available to U.S. customers.
Apple is set to compete with the Amazon Cloud Drive and the Google Music beta services. With Google's and Amazon's service you have to upload your files to their servers but because of Apple's licensing agreements with the music industry you don't have to waste time or resources uploading each song.
source - Apple