The only thing iCloud has to do with your music is giving you the ability to download previous purchases you made with your apple ID onto your device. You may be thinking of iTunes Match, which is coming soon, but we won't go into that.
Yes, iCloud is essentially a backup of your important data and also a continuous syncing of info with your other devices. You don't have to worry about losing your contacts, calendars, etc because all that stuff is saved and associated with your iCloud account. If you lost your phone and got a new one, you just have to log into your iCloud account and all your info will be restored.
Also, it acts as an auto-sync with other devices. If you have an iPhone, iPad, and Mac - it will sync all your stuff through the air. Add a contact on your iPhone, it's automatically on your iPad and Mac. Put in a new calendar event on your mac, it's there on your iPhone and iPad.