Friend lobbies can hold up to eight people, the host can set matches to play anything from 1v1s to 4p free for alls, how people swap in and out, can set item use on/off, and set stages to regular/battlefield/omega. The 64-person tourneys are something else entirely.
The concept to me would be, if there were enough people, to have both a neutral/competitive lobby and a casual/party lobby and people can pick one or bounce back and forth over the night depending on their preference.