Server colocation is an attractive option for individuals and small businesses that want all the benefits of having a popular website with tons of hits, but don't necessarily want to pay for the bandwidth that such popularity requires. They still pay a fee, but it isn't for bandwidth; it's a rental charge. A company will store all of its sensitive data — web pages and downloadables, for example — onto a server, and then physically haul the server to a different location. This location is the home operation center of the server colocation provider. Once the server is there, the provider will take over and install it in their rack.
In effect, the website owner is sharing bandwidth with the server colocation provider; this is how he avoids bandwidth charges. He can also rent a server from the company, but in that case, he owns no part of the process but the data.
Once the server is installed, the site owner will receive an IP address that allows him to connect to his server from afar and, naturally, allows his customers to connect to the website. If he has loads of traffic or lots of high-density files being downloaded all the time from the site, then his bandwidth will consequently be high. By placing the bandwidth responsibility with the company that physically hosts the server, he avoids paying a charge for it.
The provider will charge the site owner for the space his server takes up, of course. In some cases, this charge is actually higher than what he would pay if he hosted the server himself. Usually, however, his expenses will be lower with this service.
A site owner shouldn't feel sorry for the server colocation provider, though. They present a volume-discount sort of arrangement, by which they host a number of servers. This allows them to make money from the service
One main advantage of server colocation is that the provider is usually very well equipped to deal with problems that might arise in the normal function of servers. Power outages can be a server's top enemy, so the provider will have backup power available, in the form of generators, to keep the servers going if electricity is somehow removed.
Another main advantage is that the provider will likely have a more secure location for all of the servers than might be available in a home or office. They make their living from providing people with a vital service, and it is in their interest to protect their investments. The site owner might have security of his own at a home or office, but the security at the business address of the server colocation provider is nearly always better.
One main disadvantage is having to access a different physical place if the site owner wants to upgrade his server or its software. Overall, though, many industry analysts conclude that the advantages outweigh the disadvantages.