A video hit the internet last night, making it look like Apple's upcoming iTunes Match/iTunes in the Cloud service could actually stream music directly from the server. AllThingsD's Peter Kafka says that's not the case. It's download only.
Apple says that what looks like a "stream" is really a simultaneous listen and download - users can hear the song while their machine ingests it.
Apple won't go into further detail about how the service will works - it was deliberately vague about it when it showed off the service at its developer conference last June, too - so we'll have to make some educated guesses here. My best hunch: If you don't "download" a music file to your library, it will sit in a more temporary cache, on a different part of your machine. Depending on the size of your machine's cache - it will presumably differ from, say, an iPhone to a MacBook - that file may occasionally be cleared out.
I'd take that explanation one step further and guess that it caches only the first few seconds of every song on your device so that it has time to begin downloading without a playback lag. It wouldn't eat a ton of space on your device, relatively speaking, and still gives the illusion of instant playback.
What's also interesting is that Kafka's sources tell him that Apple has the rights to stream music if they wanted to, but that the concept doesn't fit into their philosophy of media consumption within the Apple product ecosystem (or some jargon-laden explanation like that). They don't trust the mobile service providers to provide a constantly usable connection to a cloud service to forego local playback altogether. [AllThingsD]