Colocation hosting (abbreviated "colo") is bascially allows companies to buy a server, and then put it in a datacenter. It is often used by companies with several servers, and a server administrator (someone paid good money to keep them running). For the most part, the datacenter does nothing other than provide safe and secure facilities for companies to have their servers. They charge for physical space used as well as for the bandwidth your servers are using.
While some companies may use cheap dedicated servers, or perhaps even cheap grid hosting, there comes a point at which it becomes progressively cheaper to use Colocation hosting instead. The biggest expense though may be the people you will need to hire to keep the servers running.
Although general IT support/administrators have been known to take care of the basics for a few servers, usually someone trained in server administration is the best choice. You can expect to pay less than dedicated hosting, for the same type of hardware. You will also need to buy your own servers, routers, switches, firewalls, remote KVM, and other hardward needed to run a reliable set of servers.
