iCloud storage is only for backups, and doesn't reduce what you need to store on the phone. In fact, Apps and iTunes media are not included in the phone backup at all. Photos taken on the phone (camera roll) do backup to iCloud but remain on the phone. Photos synced to the phone from another device ARE NOT backed up to iCloud.i
Tunes store content is SYNCED to your iTunes library on your computer, not iCloud. You may be thinking of the optional "iTunes Match" where you can "match" content in your iTunes library to iCloud and stream the music to the phone without having to store in on the phone. This doesn't apply to apps or photos.