How does it work?

I've done some searching and still can't really understand this. I recently finished building a Debian server (with a i5 3570k processor) and found out about Rasplex. From what I understand, Plex requires a strong processor to do the transcoding. How can something like the Pi do that transcoding? It would have been a much cheaper alternative :P Also, are you limited by the storage you can attach to it?

This is a *client*, not a server.

This is in the FAQ.

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