It's a resource for developers, but it should help you see how the service works. Basically, enabling the backup feature allows applications to backup their data to Google's servers. Using it is pretty much all automatic. When you reformat your phone or get a new one, it'll automatically restore you data when you sign into your Gmail account. It'll even download and install your apps (those that are configured by the developers to use the backup service anyways) as well as the application settings.
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