I think this is likely illegal and not much different from many p2p file sharing programs, just a smaller scale. If you own the IP rights to the music then you are free to do whatever obviously.
Other than that you should be able to test this pretty easily by copying some music to your hosted site and mapping a drive to the folder that contains the music. Then point iTunes to that location for the library. A web interface is possible for iTunes and there are existing programs to do this already.
Certainly no usability guarantees from me on this idea, but it is innovative.
Let me know what else you come up wit and how this turns out. I am really interested n the results, not necessarily doing this for myself.