Blizzard did a stress test for Classic’s AQ opening event.
It was horrible at first with so many players, but Blizzard would change stuff on the server, restart the server, and try again. After a bunch of attempts, they got it to the point where everything was smooth and stable. There were like hundreds of people in the same area fighting giant mobs. It was really impressive and a true MMO experience.
Why can’t they do that on normal servers? I’m not sure. I got the sense they were reducing various checks (security/anti-hacks?) and reducing the amount of information sent to each player about everyone else nearby (e.g. which way other players are facing, buffs/debuffs, their cast times, etc.).