Colocation is a hosting option for small businesses who want the features of a large IT department without the costs. Many large corporations have the Internet infrastructure to host their own web servers and have a team of IT professionals to manage and design the site, individuals and small companies do not.

Colocation allows you to place your server machine in someone else's rack and share their bandwidth as your own. It generally costs more than standard Web hosting, but less than a comparable amount of bandwidth into your place of business. Once you have a machine set up, you take it physically to the location of the colocation provider and install it in their rack or you rent a server machine from the colocation provider. Once it's up and running, you access it much like you would access a Web site on a hosting provider. The difference being that you own the hardware.

A company will store all of its sensitive data — web pages and downloadable, 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 you have your server there, the server colocation provider will take over and install your server in their rack.
In effect, you are sharing bandwidth with the server colocation provider; this is how you avoid bandwidth charges. You can also rent a server from the server colocation provider. In that case, you own no part of the process but the data.

Once the server is installed, you receive an IP address, which allows you to connect to your server from afar and, naturally, allows your customers to connect to your website. If you have loads of traffic or lots of high-density files being downloaded all the time from your site, then your bandwidth will consequently be high. By placing the bandwidth responsibility with the server colocation provider, you avoid paying a charge for it.

One main advantage of server colocation is that the provider of such a service 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. A server colocation provider will necessarily have backup power available, in the form of generators, to keep the servers going if electricity is somehow removed.

Another main advantage of server colocation is that the provider will likely have a more secure location for your and others' servers than you might have in your home or your office. They make their living from providing people with a vital service, and it is in their interest to protect their investments. You might have security of your own at your home or office, but the security at the business address of the server colocation provider is nearly always better.

One main disadvantage to server colocation has to access a different physical place if you want to upgrade your server or its software. Overall, though, many industry analysts conclude that the advantages outweigh the disadvantages.