Colocation means hosting a server inside a data center. A person who owns a dedicated server can choose to host the server inside a data center for better connectivity and bandwidth. Data center provides the ideal environment for colocation hosting so most businesses choose to host their servers in a data center instead of hosting them in-house.
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.