Organizations frequently face the critical decision of choosing between colocation vs cloud computing services – or a combination of both – for their IT infrastructure needs. This choice is increasingly significant as enterprises aim to reduce their on-premises footprint, which still accounts for more than 85% of global IT spending.

Colocation involves renting data center space to host owned servers and IT equipment, providing hardware control and configuration. While cloud computing offers on-demand access to shared, provider-managed computing resources, enabling scalability and flexibility without hardware management.

Dgtl Infra provides a comprehensive analysis of colocation and cloud computing, exploring their fundamental differences and unique characteristics. We compare and contrast these distinct approaches across nine key aspects, including ownership, scalability, costs, customization, security, and more. By the end, you will gain a thorough understanding of the advantages and disadvantages of each approach, empowering you to make an informed decision for your organization’s IT infrastructure needs.

Understanding Colocation and Cloud

Colocation and cloud computing are two distinct approaches to hosting and managing an organization’s IT infrastructure through outsourced services delivered by third-party providers, rather than managing the IT infrastructure in-house.

Colocation and Cloud Comparison Showing Data Center Servers Technology Infrastructure

Each deployment model operates differently:

  • Colocation: Involves renting space in a third-party colocation data center to house an organization’s own servers, storage, and networking equipment. Here, the organization retains control over the hardware, software, and data
  • Cloud Computing: Refers to the delivery of computing resources, such as servers, storage, networking, databases, and software, over the internet on a pay-per-use basis. Here, the infrastructure is owned and managed by a cloud service provider (CSP)

While differing in their approach, providers of colocation and cloud services both offer high levels of uptime, redundancy, and failover mechanisms to deliver continuous availability and minimize downtime for an organization’s IT operations.

Historically, colocation catered to large enterprises and organizations with substantial IT infrastructure requirements, while the cloud served smaller businesses and startups seeking flexibility and cost-efficiency. However, increasingly, organizations are adopting hybrid IT strategies that leverage both colocation and cloud services to create a robust, resilient, and optimized infrastructure.

Data Center Professional Adjusts Servers Digital Transformation Visualized with Computing Infrastructure Services

Market Size – Colocation vs Cloud

The colocation data center market size reached over $65 billion in 2023 and is projected to grow at a CAGR of over 12% from 2024 to 2030. In comparison, according to Gartner, the global cloud computing market size surpassed $500 billion in 2023 and is expected to expand at a CAGR of more than 15% from 2024 to 2030.

Differences Between Colocation and Cloud

While both colocation and cloud solutions aim to provide a reliable, scalable, and secure environment for an organization’s applications and data, they differ in several key ways:

Ownership and ManagementCustomer owns hardware and manages infrastructureProvider owns hardware and manages infrastructure
ScalabilityLimited by physical space and resourcesEasily scalable on-demand, virtually unlimited
Upfront CostsHigh upfront costs for hardware and setupLow upfront costs, pay only for usage
Ongoing CostsLower ongoing costs, mainly for space and powerHigher ongoing costs; pay-as-you-go pricing based on resource consumption
CustomizationFull hardware control, customization for unique or specialized needsVirtualized customization, limited to provider’s options and configurations
SecurityCustomer has full control over security measuresShared security responsibility between customer and provider
ConnectivityGreater network control, customization, provider choiceLimited physical network control, virtual configuration, shared infrastructure
ProvidersEquinix, Digital Realty, CyrusOneAmazon Web Services (AWS), Microsoft Azure

1. Ownership and Management

  • Colocation: In a colocation setup, the customer owns and provides the hardware, such as servers and networking equipment, which is then housed in the third-party data center. The customer is also responsible for managing, maintaining, and configuring their hardware and software, including upgrades, repairs, and replacements. The data center only provides the physical space, power, cooling, and network connectivity
  • Cloud: With cloud computing, the cloud service provider (CSP) owns, manages, and maintains all the underlying infrastructure (servers, storage, networking, and virtualization), and customers access the resources through the internet. This relieves customers of the burden of infrastructure management, including hardware procurement, maintenance, or upgrades
Colocation vs Cloud Data Center Servers Compared to Computing on a Digital Infrastructure

2. Scalability

  • Colocation: Scalability is limited by the physical space, power, and cooling available in the colocation facility. Expanding capacity requires purchasing and installing additional hardware, such as servers, which can take days or weeks, as it involves procurement, installation, and configuration. Moreover, colocation scalability is often limited to the capacity of individual racks, cabinets, or cages. Customers need to plan and provision for their specific requirements upfront
  • Cloud: Offers easy and rapid scalability, often within minutes or hours. Resources such as CPU, RAM, and storage can be allocated and adjusted on-demand through a web-based dashboard or API, allowing for virtually unlimited scalability. Additionally, cloud platforms provide fine-grained scalability, meaning that resources can be scaled up or down in small increments, such as adding a single CPU core or a few gigabytes of RAM

3. Upfront Costs

  • Colocation: Involves high upfront costs for the customer because they have to purchase the physical hardware, such as servers, storage devices, and networking equipment. Additionally, customers need to rent space in a colocation facility to house their hardware, which involves paying for installation fees and professional services upfront
  • Cloud: Has low upfront costs, as customers only pay for the resources they consume, without the need to invest in hardware. With cloud hosting, customers do not need to pay for facility costs because these costs are already factored into the ongoing pricing model of the cloud services

4. Ongoing Costs

  • Colocation: Ongoing costs for colocation are typically lower, mainly consisting of fees for space, power, and connectivity. However, since customers are responsible for maintaining and upgrading their own servers, storage systems, and networking equipment, these costs also need to be factored into the total cost of ownership (TCO) of using a colocation approach
  • Cloud: Cloud computing services have higher ongoing costs compared to colocation due to the pay-as-you-go pricing model, which charges for resources consumed, such as CPU, memory, storage, and bandwidth. Over time, the cumulative costs of cloud computing services can exceed those of colocation, particularly for long-term deployments or resource-intensive applications that have high traffic volumes
Contrasting Scenes Depict Data Center Monitoring and Hybrid Colo Computing Infrastructure

5. Customization

  • Colocation: Offers greater flexibility in terms of hardware customization. Users have full control over their physical servers and can choose the specific hardware components, configurations, and operating systems that best suit their needs
  • Cloud: Provides a high degree of customization through virtualization and software-defined configurations. Users can easily configure virtual machines (VMs), networks, and storage to meet their specific requirements. However, customization is limited to the options and configurations provided by the cloud provider

6. Security

  • Colocation: In a colocation facility, customers have more control over physical security measures and protocols, such as biometric access controls, surveillance cameras, and on-site security personnel. Additionally, in terms of data isolation, customers have dedicated physical servers that are not shared with other tenants, which reduces the risk of data leakage or unauthorized access
  • Cloud: With cloud services, the physical security is managed by the cloud provider, giving the customer no control over the physical access to the hardware. Additionally, cloud environments often involve multi-tenancy, where multiple customers share the same physical infrastructure. While cloud providers implement logical isolation and security measures to segregate data and resources between tenants, there is a higher risk of data breaches or unauthorized access compared to dedicated physical hardware

7. Connectivity

  • Colocation: Offers greater control and customization over network hardware, configurations of routers and switches, and optimization of network settings. Colocation also provides high-bandwidth, low-latency connectivity options with the ability to directly interconnect with tens to hundreds of telecommunications carriers, internet service providers (ISPs), and other customers. In a well-designed colocation setup directly interconnected with carrier networks, roundtrip latency can fall to <5ms within the same facility and 10-30ms within a metro region deployment
  • Cloud: Provides limited control over the underlying physical network, as it is managed by the cloud provider. Instead, configuration is restricted to virtual networks and security groups. The cloud also offers inferior bandwidth and latency compared to colocation, due to the “noisy neighbor” problem of sharing physical infrastructure with other customers and a greater number of network “hops” associated with connections over the public internet. Major cloud providers like AWS and Azure often see round trip latency of 60-80ms within regional networks
Connectivity Digital Illustration of Networks Connecting Various Hybrid Colo Computing Infrastructure

8. Energy Efficiency

  • Colocation: These data centers typically achieve Power Usage Effectiveness (PUE) ratios between 1.3 and 1.5. PUE is a metric used in data centers to measure the ratio of total facility energy to IT equipment energy, where a lower PUE indicates better efficiency
  • Cloud: Hyperscale data centers, operated by companies like Microsoft and Google, achieve PUE ratios between 1.1 and 1.2 due to economies of scale and advanced cooling technologies, such as liquid immersion cooling, direct-to-chip liquid cooling, and adiabatic or evaporative cooling

9. Providers

Advantages and Disadvantages of Colocation vs Cloud

When considering colocation and cloud computing as hosting options for an organization’s IT infrastructure, each option comes with its own set of advantages and disadvantages.

Colocation vs Cloud Comparison Between Data Center Server Farm with Computing Networks

Advantages of Colocation

  1. Hardware Control: Colocation provides organizations with full control over the hardware, enabling customization and optimization to meet specific requirements
  2. Cost Predictability: Colocation offers more predictable costs, as organizations are only responsible for the equipment and the leased space in the data center
  3. Physical Security: Colocation data centers offer robust physical security measures, such as biometric access control and 24/7 surveillance

Disadvantages of Colocation

  • Upfront Investment: Colocation requires a significant upfront investment in hardware, such as servers, storage devices, and networking equipment. This can be a financial burden for some organizations
  • Maintenance Responsibility: Organizations are responsible for maintaining and updating the hardware, which can be time-consuming and require specialized expertise
  • Limited Scalability: Scaling the infrastructure can be more challenging with colocation, as it requires purchasing and installing additional hardware

Advantages of Cloud

  • Scalability and Flexibility: Cloud computing allows for easy scaling of resources up or down based on demand, providing flexibility to accommodate changing needs
  • Reduced Upfront Costs: Cloud services typically operate on a pay-as-you-go model, eliminating the need for significant upfront investments in hardware
  • Managed Services: Cloud providers offer a wide range of managed services, taking care of infrastructure maintenance, updates, and security, allowing organizations to focus on their core business
Glowing Digital Interface on Dark Background with Futuristic Technology Infrastructure Elements

Disadvantages of Cloud

  • Dependence on the Internet: Cloud services rely on a stable and fast internet connection, which can be a challenge in areas with limited connectivity or during network outages
  • Data Security and Privacy: Storing sensitive data in the cloud raises concerns about data security and privacy, as the organization is entrusting its data to a third-party provider
  • Vendor Lock-In: Migrating between cloud providers can be difficult due to differences in architectures and proprietary technologies, which may lead to vendor lock-in for organizations

Frequently Asked Questions

Colocation vs Cloud and Managed Hosting Services Servers and Network Infrastructure

What is Colocation vs Managed Hosting vs Cloud?

When it comes to hosting options for businesses, there are three main categories: colocation, managed hosting, and cloud computing.

  • Colocation: Involves renting space in a data center to house a company’s own servers and equipment, while the data center provides power, cooling, and network connectivity. The company maintains full control over its hardware and software
  • Managed Hosting: A step up from colocation, where the hosting provider not only houses a company’s servers but also manages and maintains them. Often referred to as “managed colocation“, the provider handles tasks such as hardware upgrades, software updates, and technical support
  • Cloud: This form of hosting is the most flexible and scalable option, where applications and data are hosted on virtual servers in a cloud data center. Resources can be easily scaled up or down based on demand, and the company only pays for what it uses

READ MORE: Cloud vs Data Center – A Comprehensive Guide

How Can a Hybrid Approach Combine Colocation and Cloud Benefits?

A hybrid approach that combines colocation and cloud services can offer organizations the best of both worlds Here’s how:

  • Colocation provides dedicated physical infrastructure, allowing for greater control, security, and customization of hardware, while the cloud offers scalability, flexibility, and cost-efficiency for workloads that require rapid provisioning and dynamic resource allocation
  • By strategically distributing workloads between colocation and cloud environments based on specific requirements, organizations can optimize performance, comply with data sovereignty regulations, and maintain legacy applications that may not be suitable for the cloud

At present, nearly 80% of enterprises with colocation footprints also leverage at least one major public cloud provider. This hybrid setup enables seamless integration and data exchange between on-premises, colocation, and cloud resources. It facilitates a unified IT environment that leverages the strengths of each platform to meet diverse business needs and adapt to changing demands.

How do Cloud vs Colocation Services Manage Data Differently?

Cloud and colocation services manage data differently in several key ways:

  • Infrastructure Ownership and Management: Cloud services store and manage data on shared, virtualized infrastructure owned and operated by the cloud provider, while colocation involves the customer owning and managing their own physical servers and storage hardware within a third-party data center facility
  • Data Management Responsibilities: With cloud services, data management tasks like backup, replication, and security are typically handled by the provider as part of the service, whereas in colocation the customer retains full responsibility for data management on their owned equipment
  • Scalability and Flexibility: Cloud services offer greater scalability and flexibility to quickly provision additional data storage and processing resources as needed, while colocation provides more direct control over hardware and configurations but requires the customer to plan for and deploy extra capacity themselves
Mary Zhang covers Data Centers for Dgtl Infra, including Equinix (NASDAQ: EQIX), Digital Realty (NYSE: DLR), CyrusOne, CoreSite Realty, QTS Realty, Switch Inc, Iron Mountain (NYSE: IRM), Cyxtera (NASDAQ: CYXT), and many more. Within Data Centers, Mary focuses on the sub-sectors of hyperscale, enterprise / colocation, cloud service providers, and edge computing. Mary has over 5 years of experience in research and writing for Data Centers.


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