So what does iCloud do exactly? What happens if you are somewhere without service, are all of your songs still available to you?
Your stuff is stored locally. The cloud acts (sort of) more as a distribution buffer, ensuring that all your devices have copies of all your files. (Granted you may not fit all files on all devices; they’ll do what they can.)
The emphasis is on _downloading_, not _streaming_. If you are somewhere without service, you have all the songs that were synced just before you lost service.
iCloud (more precisely, the iTunes in the Cloud feature) hosts your iTunes library. Anywhere you have service, you can download songs to your iPhone/iPod Touch/iPad. When you don't have a signal, you can still listen to whatever you've previously downloaded.
The rest of iCloud is basically an upgrade of the services offered in MobileMe, but for free. It synchs contacts, calendars, documents, apps and settings remotely. It also supports backups and software updates remotely, so that now it's feasible to have, say, an iPad for someone who doesn't have access to a computer.