13370rc has selected skin01 for his character. When he is approaching your character's view, your client will ask the server for information about the character(armor, name, skin, etc), and it will return skin01 for the skin.
You've got an amazing computer, and are running the game on ultra. Your client retrieves the ultra resolution version of skin of 13370rc, which happens to be 4096x4096, and it looks amazing.
P00rN00b101 is also nearby. His client sends the same request, only he is dirt poor and is playing from his library, on the lowest settings. When the server returns skin01, his client retrieves the low resolution version of the skin, which is a measly 128x128, and looks like crap.
In both cases, the server does the exact same amount of work. The only difference is what resolution texture the client displays, and all of that work is done on your computer. All the server does is retrieve information.