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Co-location refers to the way IT equipment and resources are located or installed. This usually refers to the networking hardware resources owned by an organization, such as Web or database servers, which are located outside the vicinity of the organization's premises and "co-located" with another organization's hardware, usually an ISP or a service provider. This is usually done because the ISP might be the best candidate for maintaining the Web server hardware for the organization and it would be better to keep the hardware in a more suitable place since ISPs have specially built places for networking hardware.
Co-location facilities are usually employed by service providers to store equipment used by their clients and of course, also their own. These facilities provide power, cooling, space and physical security for the equipment. The reason that organizations co-locate their hardware resources is because they are not able to provide a suitable location and maintenance for such specialized hardware within their premises. It would be too expensive for them to create special facilities, while service providers already have these type of facilities because of the nature of their business.