Colocating the server gives you the greatest flexibility. You get to choose the hardware configuration of the server and the software that goes on it. The hosting company maintains the connection to the Internet and deals with environmental details such as uninterruptible power supplies (UPSs), fire controls, and air conditioning. On the other hand, you're responsible for that server's upkeep.

Companies that offer colocation say they're moving away from this service and encouraging their customers to rent a dedicated server. This means renting an entire server from the hosting service, but having the hosting company service and maintain it.

When you opt for dedicated server colocation with the hosting company, you pay for the physical space that your server takes up. Colocation hosting usually requires a higher startup cost than renting a server from a hosting company, according to figures from Digital Nation. The server itself will cost around $4000 for a low-end model, and $9000 for a midrange server. A half-rack of space at a colocation facility will cost between $500 and $700 to start up and the same amount each month. Finally, you'll have to purchase a switch or a router, which will cost between $1500 and $2000 at the low end. This would result in an initial outlay of at least $7500 -- and it doesn't include the costs of staff time for setup and configuration, or the cost of equipment depreciation, insurance, and the standby equipment.

Not all colocation service providers require the same capital outlay, however. Concentric Networks' colocation plan includes connecting to a monitored network, fire suppression, redundant power, and redundant air conditioning. Most companies that offer server colocation service also sell service contracts to maintain the server and its connections. These service contracts will guarantee a certain percentage of uptime per month, and the fee will increase as the guaranteed uptime increases.