They are sending graphics files, there is damage and building damage in GTA IV online, thats why it doesn't look as crisp because the game is constantly being updated between the 16 players within the game, which wall is blown out, where bullet holes are, which car has been blown up, where a dead pedstrian will be lying etc... This is not as simple as Unreal Tournament 3 for instance, where the game world is populated with static scenary that is the same for all players, and no unpredictable models, GTA has lots of unpredictability i mean you cannot control pedestrians and you cannot control what their cars do in your online game, there is a hell of a lot of data transfer going on to make GTA IV work online.

Damage is only a textual indicator. The damage textures are loaded locally. It's akin to an MMO, particularly instances where there are large numbers of online players.

Negative existenz. All of those damage things are local. The only thing being sent over the internet is information about that damage, like location and how it's going to affect handling of the car. The damage visually is still all local.

Same with bulletholes. That's a good example actually. Basically what's happening is the internet is telling you, hey xbox360, put a bullethole decal here, here and here. That's it. It's not actually sending the bullethole decal.