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Hosting Your Server: Dedicated vs. Colocation

by James Fielding 22. April 2010 16:21

As hardware costs drop, and the need to control IT costs increases, we’ve noticed that colocation is becoming a viable option for many small and medium-sized businesses (SMB). Whether you're using a Microsoft or Linux-based system,  here’s the bottom line:

Dedicated server(s): You’re renting servers from someone on a server-by-server basis.

With dedicated servers, you pay a premium for not worrying about the hardware: If there are any hardware issues, someone else replaces/fixes it.

Colocation: You’re renting space for your server from someone.

In the case of colocation, you get an allotted amount of physical space in a facility that provides your hardware with power and bandwidth, as well as an ideal environment (e.g. climate control, power supply management, facility security), but what you put in your space is up to you.

What’s Best for You?

Of course, there’s no "one-size-fits-all" answer, but here are some things to consider:

  1. In general, for short-term projects (less than a year), dedicated servers are cheaper and easier. But if your hosting requirements are more than two years in duration, you’ll likely see significant cost-savings in going with colocation.
  2. In the past, it used to be that if you needed only one or two servers, and after factoring for Microsoft license costs, you were left with the non-choice choice: You went dedicated. But today, with MS Small Business Server, and Essential Business Server being really cost-effective alternatives for SMB, we’ve seen a dramatic shift. Now, you can run a Small or Essential Business Server offsite using colocation, which is something that many dedicated server providers won't do for you. This has dramatically shifted the landscape for SMBs looking to implement MS server solutions.
  3. Also, a lot depends on your technical experience and abilities. If you, or a member of your team, is comfortable with computers, then colocation is a reasonable choice. If you know and/or care little about servers, switches, networking, and firewalls, then you may need to factor in the cost of outsourcing this portion of your IT administration.
  4. Finally, if you want to have physical access to your machine, then colocation is the obvious answer for you.

Other Things to Consider

There are a couple of points-of-confusion that seem to always come up in the dedicated versus colocation debate. Here's some clarification:


This probably causes the most confusion when comparing dedicated to colocation. When you’re coming from managed hosting, you’re used to thinking about your bandwidth quota as the total transfer limit for the month calculated in gigabytes (GB). Denoting bandwidth usage this way helps non-network-savvy people understand exactly how much data they can move in a month, but as a network administrator, you’re really concerned with the amount of data moving through your pipe at any given second, or your Mbit/s rate.

As such, when you move into colocation, the provider sells you bandwidth based on how they're billed - per mbps transferred, typically measured using 95th percentile billing (see below). So, given a colocation 1 Mbit/s transfer rate, and having it running at the limit each second for a month, you’d theoretically end up with:

(1,000,000 / 8bits * 60s * 60m * 24h * 30.5days) / 1,000,000,000 = ~330GB/month

“But what about 1Mbit/s actually equalling 1024Kbit/s,” you say? Well, as it turns out in data communications, signal pulses and have historically been counted using the decimal number system, so a megabit is 1,000,000 bits and a kilobit is 1,000 bits.
Of course, colocation bandwidth limits apply to metered usage accounts. Some providers have unmetered bandwidth, which comes with a price tag to match this convenience.

95th Percentile Billing

The 95th percentile is the mathematical calculation most widely used to determine billings for variable rate or "burstable" network bandwidth connections. It works like this:

You subscribe to a colocation service that includes a network bandwidth allowance stated in Mbit/s. As such, you’re permitted to consume as much bandwidth as you wish up to this limit. Since most networks are oversubscribed, there is often some room for some bursting without advanced planning, when it comes time to bill you for your usage, your provider ignores the top 5% of your peak usage, and bills your bandwidth transfer rate at the 95th Percentile.

As long as your 95th Percentile transfer rate is at or below your bandwidth allowance, there are no additional fees. If, however, you exceed your allowance then you are invoiced for the additional bandwidth you consume.

For example, for 100 transfer rate samples, if the top 10 records were:

Top 10 Records Sample Rate Comment
100 2180 Kbps Ignored (top 5%)
99 1970 Kbps Ignored (top 5%)
98 1800 Kbps Ignored (top 5%)
97 1560 Kbps Ignored (top 5%)
96 940 Kbps Ignored (top 5%)
95 920 Kbps *95th Percentile*
94 880Kbps  
93 850 Kbps  
92 780 Kbps  
91 720 Kbps  

In this case, even though you sometimes sustained traffic at speeds as high as 2180 Kbps, your actual 95th percentile consumption was 920 Kbps. If your subscription included 1Mbit/s of network traffic then your usage is below your subscription allowance.

Hopefully this overview will help you implement the best hosting solution for your business.

Happy Hosting,
James Fielding

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Sciosoft Systems is a Canadian web design & development company based in Muskoka, which is in central Ontario. We provide ASP.NET website & Windows Server application development services to small and medium-sized business, as well as local government and not-for-profit groups. If you have a website project you’d like to discuss, please visit us at

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