If it's DRM free, how will the yearly subscription work? It's not like the tracks can expire.
This was the curious bit for me as well. So for $25 all my music 'upgrades' to 256 bit AAC, can I replace the MP3's I ripped with 128bit MusicMatchJukebox in '99 and are sitting on my filer? And what is this $25 really paying for? Is Apple empowered by the labels to license me a DRM free digital copy? If I pay the $25 annual fee will it automatically 'upgrade' any songs that come on over a torrent link? Is this reall…
2. I don't think they're giving you a license. You're supposed to already have a license for the song you already have. Apple is merely replacing a likely lower-quality copy with a higher-quality copy.
3. Doubtful (to the point that I almost said no). You aren't going to get immunity from prosecution, but I'm guessing that Apple isn't going to try too hard to find people that have pirated their collection and I think the music industry knows that. It isn't Apple's style (there's no product key on their OS, no activation on their products, etc.). They might do something that tries to figure out if it was a legitimately acquired track, but maybe they'll just go the "we can't match that track" route if it's flagged. Just like #2, you're going to be in the same license and legality position that you were in before.
This is a convenience measure - for you and Apple. For you, this syncs your music between all your computers/devices. For Apple, if they can match the tracks, they don't have to store all the extra tracks as duplicates on their storage. A syncing service wouldn't be useful to you if it only dealt with the music you bought from Apple. They know that it's only useful if it does all your music and so they created a matching service to be bandwidth, time and space efficient. The service costs money to create and run and so they're charging a small fee for it. It's highly doubtful that it will change anything on the legal end.